Rick transferred the following assets and liabilities to Warbler Corporation.
In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000).

Question

Rick transferred the following assets and liabilities to Warbler Corporation.  ​
In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000).

Quizplus · Accepted Answer

Rick transferred assets and liabilities to Warbler Corporation in exchange for $75,000 in cash and stock. The fair market value of the stock is $225,000, so the total consideration received by Rick is $300,000 ($75,000 + $225,000).

To determine the recognized gain, we calculate the total consideration received ($300,000) and subtract Rick's adjusted basis in the assets and liabilities transferred. We do not have information about Rick's adjusted basis, but we do know that it cannot be higher than the fair market value of the assets and liabilities.

Therefore, the recognized gain is at least $75,000 (the cash received), and could potentially be higher if Rick's adjusted basis is lower than the fair market value of the transferred assets and liabilities. Therefore, choice A is the best answer.

Choice B is incorrect because Rick's recognized gain cannot be lower than the amount of cash received. Choice C is incorrect because we do not have enough information to determine Rick's basis in the stock. Choice D is incorrect because the basis of the assets received by Warbler Corporation is determined by their fair market value at the time of transfer, not the basis of the stock held by Rick.

Rick Transferred the Following Assets and Liabilities to Warbler Corporation