Mary a calendar year taxpayer sold Blackacre, which had a basis of $100,000 to Penny on February 1, 20X1 for $800,000. The terms of the sale permitted penny to re-convey the land for $800,000 if, within one year of the date of the sale, Penny was unable to change the zoning consistent with the intended use. Penny’s request for a change in zoning was rejected on December 21, 20X1. Penny determined on December 22, 20X1 that because there was no way that the zoning decision could be reversed, she requested that the property be re-conveyed and she received a return of her purchase price.

The re-conveyance occurred on December 31, 20X1. What tax consequences result from the reconveyance?

How would your answer be different if reconveyance does not take place until January 5, 20X2?

Reference the North Texas Lumber v United States case 281US11 (1930)