In the following question, cite your authority only if you are asserting that income or gain is excluded from the taxable income of the year at issue - citing Code sections is sufficient (identifying subsections is not needed).

In 2012, Rafael, a single individual, received a large inheritance from his rich uncle Donald's estate.

He immediately started looking around for investment opportunities. He found two start-up

companies, each with a promising future in the manufacturing process automation technology

industry. He obtained financial information on those companies, including the following:

(All amounts in $USD)

Company Czar Innovation, Inc. Kor Technologies, Inc.

Total Assets (FMV) 60,000,000 25.000,000

Total Assets (Tax Basis). 40,000,000 15.000.000

Total Liabilities 50.000.000 5,000,000

Total Sales 8,000,000 20.000,000

Net Income 1,000,000 5,000,000

Czar Innovations was actively looking for investors. Kor Technologies had just closed its latest round

of stock issuance and was not looking to issue any additional stock. However, one of its

shareholders was looking to sell some of his shares to raise cash to deal with a personal emergency.

On June 30, 2012, Rafael purchased $2 million of Czar innovation, Inc. from the company, and

another $2 million in stock of Kor Technologies, Inc. from the shareholder willing to sell his shares.

Both companies did extremely well over the next several years. Rafael sold his holdings in both

companies on August 31, 2020, for $25 million each, raking in a total of $50 million. Rafael was still

single on December 31, 2020.

A. What are the tax consequences to Rafael, of his sale of investments in 2020? Please include a

discussion of the character of the gain or loss and the maximum rate of taxation it could be subject

to (Disregard the "net investment tax"). Please cite the authority you rely on for your conclusions.

B. Is there anything Rafael can do to make those tax consequences more favorable? If so, fully

explain the tax consequences of such an action. Please cite your authority.