Adept paid $5,000 for a one-year option to buy Grumpy's property for $100,000 (meaning the total payments would be $105,000 if Adept buys the property). See 1234(a) and (b)(1).

a. If Adept exercises the option, what should be his basis in Grumpy's former property?

b. If Adept sells the option for $6,000, what, if anything, is Adept's gain? See 1001(a).

c. How would Grumpy be taxed when he gets the $5,000? When he is paid the remaining $100,000? See 1234(a).

d. How is Grumpy taxed when Adept fails to exercise the option to buy the property and the option expires a year later?

e. Assume that Grumpy had basis in his property of $75,000 and that in year one Adept paid Grumpy $75,000 as an option price, allowing Adept the right to buy the property on paying an extra $30,000, in year five. How would you characterize this transaction? Consider whether, if you were Adept, you would let the option lapse.