Question

Simone transferred 100 percent of her stock in Purple Company to Plum Corporation in a Type A merger. In exchange, she received stock in Plum with a fair market value of $500,000 plus $500,000 in cash. Simone's tax basis in the Purple stock was $200,000. What amount of gain does Simone recognize in the exchange and what is her basis in the Plum stock she receives

Answer 1

The gain recognized therefore is $500,000 and a basis in Plum of $200,000

Step-by-step explanation:

To answer this question, first we determine, the consideration received by Simone as follows

Stock of Plum = $500,000

Cash consideratio= $500,000

Total consideration= $1,000,000

less: the tax basis = ($200,000)

Based on this SImone's gain to be recognized is $1,000,000 - $200,000 = $800,000

However, the actual gain to be recognized will be the lesser of the gain calculated above ($800,000) or the cash received ($500,000)

This imeans that the new stock basis

= $200,000 + $800,000 - $500,000= $500,000

The gain recognized therefore is $500,000 and a basis in Plum of $200,000