IPM Inc. and Zeta Company formed IPeta Inc. by transferring business assets in exchange for 1,000 shares of IPeta common stock. IPM transferred assets with a $675,000 FMV and a $283,000 adjusted tax basis and received 600 shares. Zeta transferred assets with a $450,000 FMV and a $98,000 adjusted tax basis and received 400 shares. Compute IPM and Zeta's realized and recognized gain on the exchange.

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Quizplus · Accepted Answer

In a transaction structured as a tax-free exchange under the Internal Revenue Code, corporations and their shareholders can transfer assets in exchange for stock without recognizing gain, provided certain conditions are met. Here, both IPM and Zeta transferred assets to IPeta in exchange for its stock, which typically qualifies as a tax-free exchange. IPM's realized gain is the difference between the FMV of the shares received ($675,000) and the adjusted tax basis of the assets transferred ($283,000), which equals $392,000. Zeta's realized gain is the difference between the FMV of the shares received ($450,000) and the adjusted tax basis of the assets transferred ($98,000), which equals $352,000. However, in a qualifying tax-free exchange, this gain is not recognized for tax purposes.

IPM Inc and Zeta Company Formed IPeta Inc