J owns all the stock of T. T\'s only asset is a thoroughbred racing track with a
ID: 2446028 • Letter: J
Question
J owns all the stock of T. T's only asset is a thoroughbred racing track with an adjusted basis of $1,200,000 and a fair market value of $3,000,000. J's basis in the T stock is $1,000,000.P, a corporate developer of shopping malls wants to acquire the race track for a mall site. P and J agree on a Type C reorganization, with T trading the race track for P stock worth $2,580,000 and $20,000 in cash and then liquidating. P will give T some treasury shares P bought in the market for $2,000,000. Assume this will qualify as a good type C reorganization to which T and P are "parties to a reorganization."
A upon the transfer the race back to P for the stock and cash, T will recognize gain of $20,000
B Although the transaction is good Type C reorganization per the 368(a)(1), the exchange will violate the continuity of business enterprise rule because P will use the race track in a different business.
C T will not recognize any gain under section 361 because it distributes the boot in liquidation as required.
D none of the above.
please explain why you choose this answer. Thank you.
Explanation / Answer
Answer:A upon the transfer the race back to P for the stock and cash, T will recognize gain of $20,000
Because A must recognize $20,000 of gain, the lesser of 1)the cash boot of $20,000 or 2) the amount of gain A would have recognized had the property been sold to X, or 1800000.
The amount of gain required to be recognized under Section 351(b) is often referred to as the “boot within gain” rule. It works like so: the transferor recognizes gain to the extent of the lesser of two numbers:
The cash received, or
The amount of gain that would have been recognized had the transferor sold the appreciated property to the corporation.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.