Question

1.       A stockholder exchanges land with a basis of $ 20 million, subject to a $ 14 million mortgage for common stock and $ 7 million in cash. The fair market value of the land is $ 45. How much boot (in millions) did the stockholder receive on this transaction?

Answer 1

The taxpayer is not receiving common stock only, he is also receiving relief from the mortgage on the land. The taxpayer is relieved of the $14 million debt. The $14 million would have been categorized as Boot. And gain would have been recognized on the lesser of the gain realized or the boot received by the taxpayer.

Stockholder basis in land : $20 Million

FMV of Stock received: $31 million ($45 million - $14 million)

Mortgage assumed by the corporation: $14 million

Total amount realized by stockholder: $45 milion ($31 million + 14 milllion)

Gain realized: amount realized of $45 million – tax basis of $20 million = $25 million