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Simone transferred 100 percent of her stock in Purple Company to Plum Corporation in a Type A merger
Simone transferred 100 percent of her stock in Purple Company to Plum Corporation in a Type A merger. In exchange, she received stock in Plum with a fair market value of $670,000 plus $670,000 in cash. Simone's tax basis in the Purple stock was $220,000. What amount of gain does Simone recognize in the exchange and what is her basis in the Plum stock she receives?
Multiple Choice
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$1,120,000 gain recognized and a basis in Plum stock of $1,340,000.
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$1,120,000 gain recognized and a basis in Plum stock of $670,000.
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$670,000 gain recognized and a basis in Plum stock of $670,000.
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$670,000 gain recognized and a basis in Plum stock of $220,000.
Expert Solution
Answer : d. $670,000 gain recognized and a basis in Plum Stock of $220,000
Calculation
Gain recognized is
• Gain realized
• Cash Recieved ; Whichever is less
Gain realized = $670,000+$670,000 - $220,000
Gain realized = $1,340,000-$220,000 = $1,120,000
Cash Received = $670,000
Therefore gain recognized = $670,000
Basis in Plum stock = $220,000
Therefore answer is $670,000 Gain recognized and a basis in Plum Stock of $220,000
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