Question

A shareholder bought 10,000 shares of Coral Corporation for $50,000 several years ago. When the stock is valued at $90,000, Coral redeems the shares in exchange for 5,000 shares of Blush Corporation stock and a $10,000 Blush bond. This transaction meets the requirements of § 368. Which of the following statements is false with regard to this transaction?

a. The shareholder has a realized gain of $40,000.

b. The shareholder has a postponed gain of $30,000.

c. The shareholder has a basis in the Blush stock of $60,000.

d. The shareholder has a recognized gain of $10,000.

e. All of the above statements are true.

Answer 1

In the given case, the shareholder has received shares of Blush Corporation at an FMV (Fair Market Value) of $ 80,000.

This is arrived as follows:

Stock value of Coral Corp. ( $90,000) - Bonds of Blush ($10,000) = $80,000.

There is a postponed gain of $30,000.

Therefore the basis in the Blush stock = $80,000 - $30,000 which is equal to $50,000.

Therefore Option C is false, as the shareholder has a basis in the Blush stock of $50,000 and not of $ 60,000.

Hope it is helpful!!