Question

Acquiring Corporation transfers $500,000 stock and land with a value of $400,000 (basis of $250,000) to Target for most of its assets. The assets Target does not transfer to Acquiring in the “Type A” reorganization are distributed to Target’s shareholder, Tia. They are valued at $100,000 (basis of $120,000). Acquiring stock and the land also are distributed to Tia in exchange for her stock in Target. Tia’s basis in her Target stock is $650,000.

Required: Show supporting computations for all answers to the following questions.

1.   What amount of gain or loss is recognized by Acquiring Corporation?
2.   What amount of gain or loss is recognized by Target Corporation?
3.   What amount of gain or loss is recognized by Tia?
4.   What is Tia’s basis in the Acquiring stock she receives?

Answer 1

Part 1

Gain on the land = value –basis = $400,000-$250,000= $150,000

Acquiring corporation recognizes gain on land = $150,000

Part 2

Target realizes loss on assets = value –basis =$100,000 – $120,000 = $20000

However, loss recognition is disallowed. Therefore, Target Corporation recognize loss on the assets = $0 (Target Corporation cannot recognize its loss on the assets)

Part 3

Value received by Tia received for her Target stock = Acquiring stock + land + assets = $500,000 + $400,000 + $100,000 = $1000000

Tia’s basis in the stock = $650,000

Realized gain = value –basis =$1000000-$650000 = $350000

Gain recognized by Tia = boot received =land + assets = =$400,000 +$100,000 = $500000

However, recognized gain cannot be greater than realized gain,

Tia recognizes a gain = $350,000

Part 4

Tia’s basis in the Acquiring stock = Adjusted Basis in Acquiring corporation’s Stock = $500000