Buddy owns 100 of the outstanding shares of Binder Corporation stock. Buddy's basis in his Binder Corporation stock is $100,000. Binder Corporation is merged with Clipper Corporation in a tax- free reorganization. Buddy receives 50 shares of Clipper stock worth $150,000 and $150,000 cash. The remaining 100 shares of Binder stock were owned by Bruce who received the same consideration for his Binder stock. Binder and Clipper have E&P balances of $250,000 and $500,000, respectively. Buddy and Bruce each own 25% of Clipper Corporation's 200 shares of stock after the reorganization. Which of the following is correct?

Question

Quizplus · Accepted Answer

In a tax-free reorganization, there is no recognized gain or loss on the exchange of stock for stock and cash. Buddy received 50 shares of Clipper stock, which is equivalent to the value of his 100 shares of Binder stock, so there is no recognized gain or loss on the stock exchange. Additionally, the $150,000 cash received is not considered a dividend for tax purposes, but rather a return of capital. Therefore, Buddy's basis in his Clipper stock is $100,000 (his basis in Binder stock) plus $75,000 (the portion of the E&P balance from Binder allocated to his 25% ownership in Clipper) for a total basis of $175,000. When Buddy sells his Clipper stock, he will recognize a capital gain (or loss) equal to the difference between the sales price and his basis in the stock.

Buddy Owns 100 of the Outstanding Shares of Binder Corporation