Jorge contributed land he held as an investment (fair market value $120,000; bas
ID: 2548485 • Letter: J
Question
Jorge contributed land he held as an investment (fair market value $120,000; basis $55,000) and inventory (fair market value $80,000; basis $75,000) to ABC Corporation in exchange for 50 percent of the ABC stock (50 shares valued at $160,000) and $40,000 cash in a qualifying $351 exchange a) What amount of gain does Jorge recognize on the exchange? What is the character of the gain? What would be Jorge's basis in his ABC stock after the exchange? b) Assume the same facts except that Jorge received $40,000 of business property from ABC instead of $40,000 cash. What is the amount and character of gain Jorge would recognize on the exchange? c) Assume the original facts in this example except that the inventory had an adjusted basis of $90,000 so that Jorge realized a $10,000 loss on the inventory (he still realized a $65,000 gain on the land). How much gain or loss would he recognize on the exchange?Explanation / Answer
1. gain on exchange will be fv of shares+ cash less basis value of investment and stock in this case 70000 will be recognized as profit . and basis for the share will be 160000 .
2. if jorge would have received property of 40000 instead of cash there will not be any difference since fair market value of exchanged assets in 200,000 it self.
3. in last case if stock would have basis of 90000, even if profit would have 55000 and that cannot be allocated into shares profit and stock loss separately , since both items and exchanged item are not identical and profit on this transaction would be calculated on the basis of ratio of book value.
yes if he would have similar assed to exchange and has profit on exchage then cost of new asset basis will be recorded lowering profit values.
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