Rob and Fran form Bluebird Corporation with the following investments. $\begin{array}{lll}
&&\text { Fair Market }\
&\text { Adjusted Basis }&\text {Value }\
\text { From Rob- } & & \
\text { Cash } & \$ 400,000 & \$ 400,000 \
\text { From Fran- } & & \
\text { Land } & 500,000 & 440,000
\end{array}$
? Each receives 50% of Bluebird's stock. In addition, Fran receives cash of $40,000. One result of these transfers is that Fran has a:
A)Recognized loss of $60,000.
B)Recognized loss of $20,000.
C)Basis of $460,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000).
D)Basis of $400,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000).
E)None of the above.

Question

Rob and Fran form Bluebird Corporation with the following investments. $\begin{array}{lll}
&&\text { Fair Market }\
&\text { Adjusted Basis }&\text {Value }\
\text { From Rob- } & & \
\text { Cash } & \$ 400,000 & \$ 400,000 \
\text { From Fran- } & & \
\text { Land } & 500,000 & 440,000
\end{array}$
 ? Each receives 50% of Bluebird's stock. In addition, Fran receives cash of $40,000. One result of these transfers is that Fran has a:
A)Recognized loss of $60,000.
B)Recognized loss of $20,000.
C)Basis of $460,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000).
D)Basis of $400,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000).
E)None of the above.

Quizplus · Accepted Answer

Fran's basis in the land is $500,000. She receives $40,000 cash and Bluebird stock with a fair market value of $440,000. Thus, her total realized amount is $500,000 + $40,000 + $440,000 = $980,000. Since her adjusted basis in the land is $500,000, she has a recognized gain of $980,000 - $500,000 = $480,000. However, since Bluebird reduces its basis in the land to $440,000, Fran's basis in the Bluebird stock is $460,000 ($500,000 - $40,000 - $440,000).

Rob and Fran Form Bluebird Corporation with the Following Investments