Candace exchanges stocks she owns in Orange Corporation for stock in Lime Corporation plus a bond worth $44,000 (principal amount of $40,000).The exchange is pursuant to a tax-free reorganization of both corporations.Candace paid $250,000 for the stock in Orange four years ago.The Lime stock is worth $350,000.Candace recognizes gain on the transaction of:

Question

Quizplus · Accepted Answer

Since the exchange is pursuant to a tax-free reorganization, Candace does not recognize any gain or loss on the exchange of the Orange Corporation stock for Lime Corporation stock. However, she does recognize gain on the bond received as part of the exchange. The gain recognized is the difference between the bond's fair market value ($44,000) and its adjusted basis (presumably zero since Candace did not mention any cost for it). Therefore, the gain recognized is $44,000.

Candace Exchanges Stocks She Owns in Orange Corporation for Stock