Western Airlines and Southern Airlines were both publicly traded companies. This

Question

Western Airlines and Southern Airlines were both publicly traded companies. This year, the two companies agreed to merge into a new airline titled "Allover Airlines".

Nicole owned 1,000 shares of Southern Airlines. Her basis in those shares is $6,000. Pursuant to the merger, Nicole exchanged her 1,000 shares of Southern for 500 shares of Allover Airlines shares. The Allover shares are worth $10,000.

If the merger of Western and Southern qualifies as a reorganization for federal tax purposes, how much capital gain must Nicole recognize on her 2015 federal tax return?

[Review pages 506-507]

$0 and her basis in the Allover shares is $6,000.

$0 and her basis in the Allover shares is $10,000.

$4,000 and her basis in the Allover shares is $10,000.

$4,000 and her basis in the Allover shares is $0.

$0 and her basis in the Allover shares is $6,000.

$0 and her basis in the Allover shares is $10,000.

$4,000 and her basis in the Allover shares is $10,000.

$4,000 and her basis in the Allover shares is $0.

Explanation / Answer

It will be option C.Her capital gain will be $4000(10000-6000) and her basis in allover shares will be $ 10000 for the federal tax return.

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