Question

Jorge contributed land he held as an investment (fair market value $127,000; basis $79,750) and inventory (fair market value $111,000; basis $104,000) to ABC Corporation in exchange for 50 percent of the ABC stock (52 shares valued at $205,140) and $32,860 cash in a qualifying §351 exchange. (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

a-1. What amount of gain does Jorge recognize on the exchange?

a-2. What is the character of the gain?

a-3. What would be Jorge's basis in his ABC stock after the exchange?

b. Assume the same facts except that Jorge received $32,860 of business property from ABC instead of $32,860 cash. What is the amount and character of gain Jorge would recognize on the exchange?

c. Assume the original facts in this example except that the inventory had an adjusted basis of $124,900 so that Jorge realized a $13,900 loss on the inventory (he still realized a $47,250 gain on the land). How much gain or loss would he recognize on the exchange?

Answer 1

a)

a-1) The total amount of gain recognized on exchange is as follows:

Received in exchange:

Shares amounting to $205,140 and cash amounting to $32,860

Assets given in exchange:

Land with the basis $79,750 and Inventory with the basis $104,000

Gain = ($205,140 + $32,860) - ($79750 + 104,000)

= $ 238,000 – 183,750

= $ 54,250

a-2) The gain is in the nature of Capital Gain.

a-3) Jorge's base in his ABC Stock after the exchange would be $205,140.

b) There would be no change in the amount of the gain as the nature of the exchange is not changed in the amount.

Therefore, the gain will be only $54,250.

And the character of the gain will then be the capital gain.

c) The loss of $13,900 is the difference between the market price and the adjusted basis of the inventory that is not to be considered when calculating the gain or loss on Exchange.

The increase in the inventory base will reduce the exchange gain by $20,900.

Gain on Exchange = ($205,140 + $32,860) - ($79750 + 124,900)

= $ 238,000 – 204,650

= $ 33,350

Therefore, compared to the above gain of $ 54,250 there will be reduction of $ 20,900 which will come to $ 33,350.