Buddy owns 100 of the outstanding shares of Binder Corporation stock. Buddy's basis in his Binder Corporation stock is $100,000. Binder Corporation is merged with Clipper Corporation in a tax-free reorganization. Buddy receives 50 shares of Clipper stock worth $150,000 and $150,000 cash. The remaining 100 shares of Binder stock were owned by Bruce who received the same consideration for his Binder stock. Binder and Clipper have E&P balances of $250,000 and $500,000, respectively. Buddy and Bruce each own 25% of Clipper Corporation's 200 shares of stock after the reorganization. Which of the following is correct?

Question

Quizplus · Accepted Answer

Buddy recognizes $150,000 as a capital gain because the cash received ($150,000) is considered boot in the reorganization. Since the transaction is a tax-free reorganization, only the boot received is taxable. The basis of Buddy's Binder Corporation stock ($100,000) is not sufficient to cover the cash received, thus the excess ($150,000 - $100,000 = $50,000) does not factor into the capital gain calculation directly in this context. The entire amount of cash received is treated as a capital gain because it exceeds Buddy's basis in the Binder stock. The dividend income option is incorrect because the primary nature of the transaction is a tax-free reorganization, and the cash received is treated as boot, leading to capital gain treatment rather than dividend income.

Buddy Owns 100 of the Outstanding Shares of Binder Corporation