Question

Juan transferred 100 percent of his stock in Rosa Company to Azul Corporation in a Type B stock-for-stock exchange. In exchange, he received stock in Azul with a fair market value of $1,000,000. Juan's tax basis in the Rosa stock was $400,000. What amount of gain does Juan recognize in the exchange and what is his basis in the Azul stock he receives?

a. $600,000 gain recognized and a basis in Azul stock of $400,000
b. No gain recognized and a basis in Azul stock of $400,000
c. $600,000 gain recognized and a basis in Azul stock of $1,000,000
d. No gain recognized and a basis in Azul stock of $1,000,000

Answer 1

b. No gain recognized and a basis in Azul stock of $400,000

Step-by-step explanation:

Data provided in the question

Transferred percentage = 100%

The fair market value of the stock he received is $1,000,000

And, the tax basis in the Rosa stock is $400,000

So by considering the above information, the $0 gains is recognized and his basis should equal to the tax basis i.e in the rosa stock i.e $400,000

Plus if the stock is sold for $1,000,000 than there would be a gain of $600,000 but in this case there is zero gain recognized

Hence, the option b is correct