Grand Corporation transfers 40% of its assets having an adjusted basis of $600,000 and an FMV of $800,000 to New Corporation in exchange for 75% of its single class of stock. Grand Corporation is owned equally by Annie and Betsy who are unrelated. Annie's basis for her Grand stock is $300,000 and Betsy's basis is $400,000. Annie exchanges all of her Grand stock for all of the New stock received in the exchange. Which of the following statements is correct concerning these transactions?

Question

Quizplus · Accepted Answer

When Grand Corporation transfers 40% of its assets having an adjusted basis of $600,000 and an FMV of $800,000 to New Corporation in exchange for 75% of its single class of stock, it recognizes a gain of $200,000 ($800,000 FMV - $600,000 AB). The gain is taxable.

When Annie exchanges all of her Grand stock for all of the New stock received in the exchange, she recognizes a capital gain equal to the difference between the fair market value of the New stock received ($1,066,667) and her adjusted basis in the Grand stock ($300,000), which is $766,667. Therefore, choice B is correct.

Annie's basis in the New stock is the fair market value of the stock received ($1,066,667), which is the same as the basis of the assets transferred by Grand to New, adjusted by the gain recognized by Grand on the transfer ($800,000 + $200,000 = $1,000,000). Therefore, choice C is incorrect.

Grand's basis for the New assets is the adjusted basis of the assets transferred, which is $600,000. Therefore, choice D is incorrect.

Choice A is incorrect because Grand Corporation recognizes a gain on the asset transfer to New Corporation.

Grand Corporation Transfers 40% of Its Assets Having an Adjusted