MC
1. Ula purchased stock in Purple, Inc., 6 years ago for $150,000. Purple has assets with a value of $225,000
($175,000 basis) and liabilities of $60,000. Purple transfers $200,000 of assets and all of its liabilitie
...
MC
1. Ula purchased stock in Purple, Inc., 6 years ago for $150,000. Purple has assets with a value of $225,000
($175,000 basis) and liabilities of $60,000. Purple transfers $200,000 of assets and all of its liabilities to White
Corporation in exchange for White common stock. Purple distributes the White stock and its $25,000 remaining
asset (cash) to Ula in exchange for all of her Purple stock. Purple then liquidates. How is this transaction treated
for tax purposes?
a. Ula recognizes a $15,000 gain on the exchange.
b. Ula recognizes a $25,000 gain on the exchange.
c. Ula recognizes a $25,000 gain and Purple recognizes a $25,000 gain on the exchange.
d. Purple recognizes a $50,000 gain on the exchange.
ANSWER: a
RATIONALE: The White stock received by Ula is worth $140,000 ($225,000 FMV – $25,000 cash
retained – $60,000 liabilities). Ula reports a realized gain of $15,000 ($140,000 stock
received + $25,000 cash – $150,000 stock basis). The gain is fully recognized since
the realized gain is less than the boot received.
2. Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter
stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars
stock (basis
$900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this
transaction on her tax return?
a. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $900,000.
b. Wanda recognizes a loss of $100,000. Her Jupiter stock basis is $800,000.
c. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $700,000.
d. Wanda realizes a $200,000 loss of which $100,000 is recognized. Her Jupiter stock basis is $1 million.
e. None of the above.
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