Chapter 07 Solutions

Chapter 07 Solutions - C hapter Seven Problem Solutions 27....

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Chapter Seven Problem Solutions 27. Atif realizes a gain on the transaction of $800,000 ($900,000 stock + $300,000 land – $400,000 basis). Gain is recognized by Atif to the extent of the boot received ($300,000 land) which is less than the realized gain of $800,000. This transaction qualifies as a stock redemption under § 302(b)(2) since Atif’s ownership interest changes by more than 20% due to the receipt of land. Gia’s total stock value is $12 million ($900,000/7.5%). If Atif had received solely stock worth $1.2 million ($900,000 + $300,000), his interest in Gia would have been 10% (1.2 million/12 million). A decline from 10% to 7.5% is more than a 20% reduction (2.5%/ 10%=25%). p. 7-6 and Example 4 28. The reorganization meets the requirements of § 368 and therefore receives nontaxable exchange treatment. SapCo recognizes no gain or loss because it distributes all stock and other property received in the transaction. MapleCo recognizes no gain or loss on the transaction and therefore is allowed a carryover basis equal to $840,000 in SapCo’s assets and assumes the $200,000 in liabilities. Gain, loss, and basis determination for Latisha and Theo can be determined using the four-column formula presented in Concept Summary 7.1. Realized Recognized Postponed Basis in Gain/ Loss Gain/Loss Gain/Loss Assets/Stock Latisha $300,000 $50,000 cash $ 75,000 $250,000 - 225,000 Received - 50,000 - 25,000 $ 75,000 $ 25,000 $225,000 Theo $300,000 $ –0– losses ($30,000) $250,000 - 330,000 recognized + 30,000 ($ 30,000) $280,000 Latisha recognizes a $50,000 gain due to the cash she received. She has a carryover basis in her MapleCo stock. Theo may not recognize the loss on his stock. His basis in the MapleCo stock is $280,000 ($330,000 basis – $50,000 cash received). pp. 7-5, 7-6, and Concept Summary 7.1 Page 1 of 6
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29. The $50,000 in SapCo earnings and profits (E & P) carries over to MapleCo. If MapleCo has a negative E & P, SapCo’s E & P is maintained in a separate account; otherwise, it is added to MapleCo’s E & P. The gain Latisha recognized constitutes dividends to the extent of her proportionate share of SapCo’s E & P, $25,000 (50% × $50,000). Her remaining $25,000 gain is treated as a long-term capital gain. The additional information does not affect Theo. pp. 7-6 and 7-32 31. a. The merger of Quail and Covey Corporations results in Fardin receiving $750,000 in Covey stock ($2.5 million × 30%) for his Quail stock in which he has a basis of $300,000. He has a realized gain of $450,000 ($750,000 – $300,000) but no recognized gain because he receives only stock. Kasha receives the remaining $1,750,000 in Covey stock and the
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Chapter 07 Solutions - C hapter Seven Problem Solutions 27....

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