Question

Jorge contributed land he held as an investment (fair market value $117,000; basis $58,750) and inventory (fair market value $72,500; basis $57,750) to ABC Corporation in exchange for 50 percent of the ABC stock (30 shares valued at $114,000) and $75,500 cash in a qualifying §351 exchange. (Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

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 $75,500 of business property from ABC instead of $75,500 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 $83,850 so that Jorge realized a $11,350 loss on the inventory (he still realized a $58,250 gain on the land). How much gain or loss would he recognize on the exchange?

Please answer all questions and please show work. Thanks so much.

Answer 1

a)

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

      Received in exchange:

     Shares amounting to $1,14,000 and cash amounting to $75,500

     Assets given in exchange:

     Land with the basis $58750 and Inventory with the basis $57750

    Gain = ($1,14,000 + $75500) - ($587,750)

            =$1,89,500 - $1,16,500

            = $73000

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

a-3) The Jorge's basis in his ABC Stock after the exchange would be $1,14,000.

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

    Therefore, the amount of gain will be $73,000 only.

    And the character of the gain will be in the nature of Capital gain.

c) The loss of $11,350 is the difference between the Market price and the Adjusted basis of the Inventory which is not to be considered while calculating the gain or loss on Exchange.

    The increase in the basis of the inventory will reduce the gain on exchange by $26,100.

    Gain on Exchange = ($ 1,14,000 + $ 75,500) - ($ 58,750 + $ 83,850)

                                = $ 1,89,500 - $ 1,42,600

                                = $ 46,900

Therefore, comapred to the above gain of $ 73,000 there will be reduction of $ 26,100 which will come to $ 46,900.