Question

Brad exchanges 1,000 shares of Goodyear Corporation stock having a $15,000 basis for Atlas Corporation stock...

Brad exchanges 1,000 shares of Goodyear Corporation stock having a $15,000 basis for Atlas Corporation stock having a $25,000 FMV as part of a Type A tax-free reorganization. Brad also receives $6,000 cash as part of the reorganization. How much gain must Brad recognize?

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Answer #1

The gain that must be recognized by Brad for the Type A tax free reorganization is the lesser of :-

a.) Relized gain

b.) Cash/Boot received.

In order to calculate the Realized gain , we use the following formula:-

=Fair Market Value of Stock received - Adjusted basis of stock given up

=$25,000-$15,000

Realized Gain=$10,000

Cash Received = $6,000

The less of the two amounts is $6,000

Hence, Brad must recognize a gain of $6,000 as part of the Type A tax-free reorganization

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