Question

12. Conan and Andy decide to form a new corporation, LN Corp. Conan contributes property with a basis of $10,000 and a fair market value of $18,000 in exchange for 5 shares of LN stock and $13,000 in cash, which LN borrows from a bank to finance. Andy contributes property with a basis of $35,000 and a fair market value of $80,000 in exchange for 80 shares of LN stock. a. How much taxable gain or loss will Conan recognize as a result of the transaction b. What basis will Conan take in the LN stock he receives

Answer 1

a. Conan will recognise a taxable gain of $8,000 as a result of the transaction

b. The basis Conan will take in the LN stock he receives is $ 5,000

Step-by-step explanation:

a.

Given

Fair market value= $18,000

Adjusted Basis= $10,000

A taxable gain /loss is calculated by subtracting adjusted basis from fair market value.

Hence,

Taxable gain or loss that Conan will recognize as a result of the transaction = Fair Market Value - Adjusted Basis

= $18,000 - $10,000

= $ 8,000

Since it is a positive value, then the it's a taxable gain

b.

Fair market value= $18,000

Cash Received= $13,000

The basis Conan will take in the LN stock he receives is calculated as follows;

Basis in stock = Fair market value - Cash received

= $18,000 - $13,000

= $ 5,000