Question

Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange, Red Blossom received land with a fair market value of $555,000. The corporation's basis in the Tea Company stock was $422,500. The land had a basis to Tea Company of $815,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives

Answer 1

$132,500 gain recognized and a basis in the land of $555,500.

Step-by-step explanation:

The given values are:

Fair market value,

= $555,000

Corporation's basis in the company stock,

= $422,500

Land basis,

= $815,000

Now,

The recognized gain will be:

=
`Fair \ market \ value-Corporation's \ basis`

On substituting the given values, we get

=
`555,000-422,500`

=
`132,500` ($)

Basis in land will be equal to fair market value i.e., $555,000.

Thus the above is the correct solution.