Question

John has had a very good year and has over $600,000 of taxable income, including a sizable amount of capital gains. he's thinking of selling a large block of stock to a neighbor at a price significantly below market value solely to recognize the loss. if a court disallows the loss on the sale of the stock because the sale was not bona fide and was made for the sole purpose of realizing a loss, which doctrine is being applied?

a) assignment of income doctrine
b) clear reflection of income doctrine
c) step transaction doctrine
d) sham transaction doctrine

Answer 1

The doctrine being applied in this scenario is the sham transaction doctrine (option d). This doctrine allows a court to disregard a transaction if it is determined to be a sham or fictitious in nature.

Step-by-step explanation:

The doctrine being applied in this scenario is the sham transaction doctrine.

The sham transaction doctrine is a legal principle that allows a court to disregard a transaction if it is determined to be a sham or fictitious in nature. In this case, if a court determines that John's sale of the stock to his neighbor at a significantly below-market value was not a bona fide transaction and was done solely to recognize a loss for tax purposes, the court may disallow the loss.

It is important to note that the sham transaction doctrine is applied to prevent taxpayers from engaging in transactions that have no economic substance other than to manipulate their tax liability.