Question

Horizon Corp. is owned 75% by Adams and 25% by Black. Horizon had the following assets:

                                                                       Adjusted Basis                               FMV          

Equipment                                $ 20,000                                  $ 60,000

Land                                             80,000                                   150,000

Inventory                                     50,000                                     40,000

Horizon also had liabilities equal to $20,000. Pubco, a publicly held corporation whose stock trades on the NYSE, wished to acquire Horizon’s assets. On June 30, 2019, Pubco and Horizon entered into an agreement whereby Pubco acquired all of Horizon’s assets in exchange for $204,000 of Pubco stock, $26,000 of cash and the assumption of Horizon’s liabilities.

Pursuant to the plan, upon Horizon’s receipt of the Pubco stock and cash, it was liquidated and the stock and cash were distributed to Adams and Black. Adams received $170,000 of stock and $2,500 of cash and Black received $34,000 of stock and $23,500 of cash. Adams’s basis in her Horizon Corp. stock was equal to $136,500 and Black’s basis in his Horizon Corp. stock was equal to $50,000.

A. What is the nature of the above transaction and is it a good or bad reorganization?

B. Regardless of your answer to question 31, assume that the above transaction is a nonrecognition transaction. Which of the corporate entities, if any, should recognize a gain or loss as a result of the above transactions? If either or both of the corporate entities must recognize gain or loss, what is the amount of that gain or loss?

C. Regardless of your answer to question 31, assume that the above transaction is a nonrecognition transaction. What is the amount of Adams’ realized gain or loss as a result of the above transaction? How much, if any, of that realized gain or loss should Adams recognize?

D. Regardless of your answer to question 31, assume that the above transaction is a nonrecognition transaction. What is Adams’ adjusted basis in his Pubco stock?

E. Regardless of your answer to question 31, assume that the above transaction is a nonrecognition transaction. What is the amount of Black’s realized gain or loss as a result of the above transaction? How much, if any, of that realized gain or loss should Black recognize?

F. Regardless of your answer to question 31, assume that the above transaction is a nonrecognition transaction. What is Black’s adjusted basis in his Pubco stock?

Answer 1

A) IT IS THE AMALGAMATION IN THE NATURE OF PURCHASE AND IS BAD REORGANISATION.

B) BOTH HORIZON AND PUBCO SHOULD RECOGNIZE LOSS AND PROFIT. HORIZON SHOULD RECOGNIZE LOSS OF $20000 AND PUBCO SHOULD RECOGNIZE PROFIT OF $20000

C) ADAM SHOULD RECOGNIZE LOSS OF $36000 AS HIS VALUATION OF ASSETS ON THE BASIS OF MARKET VALUE ARE MORE THAN WHAT BHE GOT

D) ADAM AVERAGE BASIS IS $136500 IN PUBCO

E) BLACK SHOULD RECOGNIZE LOSS OF $7500 AS HIS VALUATION OF ASSETS ON THE BASIS OF MARKET VALUE ARE MORE THAN WHAT HE GOT

F) BLACK AVERAG BASIS IS $50000