Acme Corporation acquires Fisher Corporation's assets in a Type A reorganization for $800,000 of Acme's nonvoting preferred stock and $200,000 (face amount and FMV)of securities. The assets have an adjusted basis of $600,000 and an FMV of $1,500,000. In addition, Acme Corporation assumes $500,000 of Fisher's liabilities. At the time of the transfer, Acme's E&P is $400,000. Fisher distributes the stock and securities to its sole shareholder Barbara for all of her Fisher stock. After the reorganization, Barbara owns 25% of Acme's stock. Barbara has an adjusted basis of $400,000 in her Fisher stock. Barbara must recognize a gain of

Question

Quizplus · Accepted Answer

In a Type A reorganization, no gain is recognized by either the acquiring or the target corporation. The $800,000 of nonvoting preferred stock and $200,000 of securities that Acme Corporation gave to Fisher Corporation have an aggregate FMV of $1,000,000 ($800,000 + $200,000). This is equal to the FMV of the assets transferred to Acme, so there is no boot. The $500,000 of liabilities that Acme assumed are considered part of the purchase price of the assets, so they increase the basis of the assets to $1,100,000 ($600,000 + $500,000). Barbara's Fisher Corporation stock had an adjusted basis of $400,000, so when she receives $1,000,000 worth of Acme stock in exchange for her Fisher Corporation stock, she has a $600,000 realized gain ($1,000,000 - $400,000). Because this is a capital transaction, Barbara's gain is a capital gain.

Acme Corporation Acquires Fisher Corporation's Assets in a Type a Reorganization