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 $545,000. The corporation's basis in the Tea Company stock was $500,000. The land had a basis to Tea Company of $780,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives

Answer 1

Gain recognized = $45,000

Basis in the land = $545,000

Step-by-step explanation:

The computation of amount of gain and basis in the land it receives is shown below:-

This refers to taxable exchange. Therefore the Red Blossom would recognize a gain = Fair Market value - Basis in the Tea Company stock

= $545,000 - $500,000

= $45,000

and

The basis in the land it receives will be the fair value or

= Basis in the Tea Company stock + Gain

= $500,000 + $45,000

= $545,000