Question

Ron and Hermione formed Wizard Corporation on January 2. Ron contributed cash of $280,000 in return for 50 percent of the corporation’s stock. Hermione contributed a building and land with the following fair market values and adjusted basis in return for 50 percent of the corporation’s stock: FMV Tax-Adjusted Basis Building 168,000 42,000 Land 252,000 168,000 Total $ 420,000 $ 210,000 To equalize the exchange, Wizard Corporation paid Hermione $140,000 in addition to her stock. (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.) rev: 10_05_2018_QC_CS-141665 a. What amount of gain or loss does Ron realize on the formation of the corporation? What amount, if any, does he recognize? b. What is Ron’s tax basis in the stock he receives in return for his contribution of property to the corporation?c. What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize?

Answer 1

1.Ron will not Realize any gain on the formaion of the corporation as only cash is transferred, so he will not recognize any amount of gain.

2. The tax basis in stock here will be amount equivalent to the cash transferred to the corporation i.e $ 280,000.

3. Calculation of gains Hermione realize on the formation of the corporation-

	Fair market value of stock received	$    420,000.00
Add	Cash Received	$    140,000.00
	Amount realized	$    560,000.00
Less	Adjusted basis of assets transferred	$ (210,000.00)
	Gain realized	$    770,000.00