Why is the shareholder’s basis in the new stock received in a corporate reorgani

Question

Why is the shareholder’s basis in the new stock received in a corporate reorganization the value of the stock received less the postponed gain?

A.This ensures that the basis is the value of the stock given up in the reorganization.

B.The realized gain is the amount that would be recognized if the stock was sold outright. Yet this gain may not be recognized unless there is boot.

C.The basis is the vehicle to ensure that the gain postponed will be recognized in the future when the stock is sold

D. A carryover basis or a substituted basis will not include the postponed gain that is necessary in a tax deferred transaction such as a reorganization.

E. All of these statements are true.

Explanation / Answer

Option C is correct.

The fair market value of the new stock less the postponed gain / plus postponed loss, is the shareholder's basis in the new stock. This gain postponed is as good as gain realized but not recognized. This provides an assurance that the gain which is currently not recognized , will be recognized when on any later date, the stock is sold.

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