Question

[The following information applies to the questions displayed below.]

Ron and Hermione formed Wizard Corporation on January 2. Ron contributed cash of $200,000 in return for 50 percent of the corporation’s stock. Hermione contributed a building and land with the following fair market values and adjusted bases in return for 50 percent of the corporation’s stock:

	FMV			Tax-Adjusted Basis
Building	$	75,000		$	20,000
Land		175,000			80,000
Total	$	250,000		$	100,000

To equalize the exchange, Wizard Corporation paid Hermione $50,000 in addition to her stock.

Assume Hermione’s adjusted basis in the land was $250,000.

h. What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize? (Leave no answer blank. Enter zero if applicable. Negative amount should be indicated by a minus sign.)

Gain or loss realized: $(20,000)

Gain or loss recognized: ---------- ?

Answer 1

(h) -- What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize?

Answer -

Step - (1) - Calculation of Gain or (loss) realized -

	Particulars	Explanation	Amount ($)
I.	Fair market value of stock received	Given in question	200000
II.	Cash received	Given in question	50000
III.	Amount realized	I + II	250000
IV.	Adjusted tax basis of assets transferred	$20000 + $250000	270000
Loss realized		III - IV	(20000)

.

Step - (2) -

Particulars	Amount ($)	Explanation
Gain or loss recognized	0	Hermione does not recognize the loss (boot received does not allow the transferor to recognize loss, only gain).