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 $637,500. The corporation's basis in the Tea Company stock was $302,500. The land had a basis to Tea Company of $672,500. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives

Answer 1

Answer: $335,000 gain recognized and a basis in the land of $637,500

Step-by-step explanation:

We should realise that this is a taxable exchange, therefore, the amount of gain that Red Blossom recognize in the exchange will be the difference between the fair market value of $637,500 and the corporation's basis in the Tea Company stock which was $302,500. This will be:

= $637500 - $302500

= $335000

Its basis in the land will be the value of the fair value which will be $637500