Discuss whether the sale of the land generates ordinary income forKarl due to laws relating to the assessability of extraordinary /isolatedtransactions. Do not discuss Capital Gains Tax.
Where appropriate, supportyour answer with legislative and case authority.Karl is a rich employee investment banker. His friend Petra ran a DVD store. Petraowned the DVD store premises and land that it was located on. Petra needed somemoney as her store was struggling financially, so Karl lent her business $100,000 at8% annual interest.
However, after a year it became apparent that her business couldnot repay this. Consequently, they came to an agreement, where in exchange for Karlforgiving the debt, he would take a one quarter interest on the land that the businesspremises was located on.
At the time of this arrangement it was agreed that the landwould be sold in the near future. Consequently, the store was demolished, and councilplans were obtained to build a 5 storey apartment in its place. Karl was the one whoorganised the demolition and worked closely with the architects and lawyers to get thecouncil approval. This involved about $20,000 in fees for architects and lawyers.Subsequently, the land with plans and council approval was sold through a real estateagent for $800,000.