Bill contributed business realty ($375,000 FMV and $113,000 adjusted basis) to Zeta Inc. in exchange for Zeta common stock. Immediately after the exchange, Bill owned 53% of Zeta's outstanding stock. Compute gain recognized by Bill and by Zeta on this exchange.

Question

Quizplus · Accepted Answer

To calculate the gain recognized by Bill, we need to determine the amount realized on the exchange. Since Bill received Zeta common stock in exchange for the realty, his amount realized is equal to the fair market value of the stock received, which is not given in the problem. However, we do know that immediately after the exchange, Bill owned 53% of Zeta's outstanding stock. This implies that the total value of Zeta's outstanding stock is $375,000 / 0.53 = $707,547. Thus, the amount of Zeta common stock received by Bill is worth $375,000 / $707,547 = $265,000. Since the adjusted basis of the realty is $113,000, the gain recognized by Bill is $265,000 - $113,000 = $152,000.

Zeta does not recognize any gain or loss on the exchange, because it received property with a fair market value equal to the fair market value of the stock issued. Thus, the answer is B.

Bill Contributed Business Realty ($375,000 FMV and $113,000 Adjusted Basis)