Question

Recap Corp has assets worth $500 with an adjusted basis of $125. The Company has common stock outstanding and bonds held by creditors, including some bonds held by shareholders. Ernie, a bondholder exchanges $100,000 of 5% bonds in exchange for $100,000 of voting stock in Recap. His basis in the bonds was 95,000.

1. Does Ernie recognize gain or loss on the exchange and if so how much?

2. What is Ernie's basis in the stock he receives?

3. Suppose instead Ernie was a common stock shareholder. His basis in the stock was $92,000. He exchanges the stock for $100,000 in recap 3% bond worth $98,000. What if any gain or loss does Ernie recognize?

4. If Recap changes its name to Pacer does Pacer (formally known as Recap) recognize gain or loss, and what is the adjusted basis of the assets inside it?

Answer 1