Carlos purchased 20% of Target Corporation's stock five years ago for $50,000.In a transaction qualifying as a "Type A" reorganization,Carlos received $40,000 cash and 6% of Acquiring Corporation's stock (valued at $60,000)in exchange for his Target stock.Target had $300,000 accumulated earnings and profits prior to the reorganization.How does Carlos treat the exchange for tax purposes?
A)As a sale of stock and recognizes a $50,000 long-term capital gain.
B)As a sale of stock and recognizes a $10,000 long-term capital loss.
C)As a dividend of $40,000.
D)As a stock redemption and recognizes a $40,000 long-term capital gain.
E)Not enough information is available to determine proper treatment.

Question

Quizplus · Accepted Answer

This is a stock-for-stock exchange that qualifies as a "Type A" reorganization. Carlos received cash and stock from Acquiring Corporation in exchange for his Target stock, which is treated as a stock redemption. Carlos recognizes a long-term capital gain of $40,000 ($60,000 - $20,000) on the exchange. Since the exchange does not involve Target distributing any of its accumulated earnings and profits to Carlos, there is no dividend income. Therefore, choices A, B, and C are incorrect.

Carlos Purchased 20% of Target Corporation's Stock Five Years Ago