Acme Corporation acquires Fisher Corporation's assets in a Type A reorganization for $800,000 of Acme's nonvoting preferred stock and $200,000 (face amount and FMV) of securities. The assets have an adjusted basis of $600,000 and an FMV of $1,500,000. In addition, Acme Corporation assumes $500,000 of Fisher's liabilities. At the time of the transfer, Acme's E&P is $400,000. Fisher distributes the stock and securities to its sole shareholder Barbara for all of her Fisher stock. After the reorganization, Barbara owns 25% of Acme's stock. Barbara has an adjusted basis of $400,000 in her Fisher stock. Barbara must recognize a gain of

Question

Quizplus · Accepted Answer

In a Type A reorganization, the acquiring corporation issues stock and securities for the target corporation's assets. The assets have a carryover basis, and any liabilities assumed by the acquiring corporation are added to the basis of the acquired assets to determine the acquiring corporation's final basis in the assets.

In this case, Acme Corporation issued $800,000 of nonvoting preferred stock and $200,000 of securities to acquire Fisher Corporation's assets having an adjusted basis of $600,000 and FMV of $1,500,000. Acme also assumed $500,000 of Fisher's liabilities. Therefore, Acme's final basis in the acquired assets is $1,100,000 ($600,000 carryover basis + $500,000 liabilities assumed).

As a result of the reorganization, Fisher distributes the Acme stock and securities to its sole shareholder Barbara for all of her Fisher stock. Barbara has an adjusted basis of $400,000 in her Fisher stock.

Barbara is deemed to have exchanged her Fisher stock for Acme stock and securities, and her total gain is the sum of her realized gain and any recognized gain. Her realized gain is the FMV of the Acme stock and securities she received, which is $1,000,000 ($800,000 preferred stock + $200,000 securities). Her recognized gain is the excess of her realized gain over the adjusted basis of her Fisher stock, which is $600,000 ($1,000,000 realized gain - $400,000 adjusted basis).

Barbara owns 25% of Acme's stock after the reorganization, which means the $600,000 recognized gain is proportionately allocated to her share of the Acme stock. Therefore, Barbara must recognize a capital gain of $150,000 ($600,000 recognized gain x 25% ownership). However, since her recognized gain does not exceed the amount of the securities she received, she does not have dividend income. Therefore, the best answer is C.

Acme Corporation Acquires Fisher Corporation's Assets in a Type a Reorganization