Chapter 20, Problem 51P

a.

To determine

Ascertain person N’s realized and recognized gain (or loss)”.

.

Explanation of Solution

Boot: Realized gain can be recognized by the transferor to the extent the transferors receive property other than stock, is known as boot.

Person N’s has a realized gain of $40,000 (1). Person N’s recognized gain, however, is $10,000, the smaller of realized gain ($40,000) or boot received ($10,000).

Working note:

(1)Calculate the amount of realized gain:

$\begin{array}{c}\text{Realized}\text{gain}\text{=}\left[\left(\text{Value}\text{of}\text{Corporation}\text{E's}\text{stock+}\text{Boot}\text{received}\right)-\text{Basis}\right]\\ \text{=}\left[\left(\text{\$260,000+\$10,000}\right)-\text{\$230,000}\right]\\ \text{=}\text{\$40,000}\end{array}$

b.

To determine

Ascertain person N’s basis in the Corporation E’s stock.

Explanation of Solution

Person N’s basis in the Corporation E’s stock is $230,000 (2).

Working note:

(2) Calculate Person N’s basis:

$\begin{array}{c}\text{Basis}\text{=}\left[\left(\text{Basis}\text{in}\text{the}\text{inventory+}\text{Gain}\text{recognized}\right)-\text{Boot}\text{received}\right]\\ \text{=}\left[\left(\text{\$230,000+\$10,000}\right)-\text{\$10,000}\right]\\ \text{=}\text{\$230,000}\end{array}$

c.

To determine

Ascertain Corporation E’s basis in the inventory.

Explanation of Solution

Corporation E’s basis in the inventory is $240,000 (3).

Working note:

(3)Calculate the Corporation E’ basis:

$\begin{array}{c}\text{Basis}\text{=}\text{Person}\text{N's}\text{basis}\text{+}\text{Gain}\text{recognized}\\ \text{=}\text{\$230,000}\text{+}\text{\$10,000}\\ \text{=\$240,000}\end{array}$

d.

To determine

Ascertain Person C’s realized and recognized gain (or loss).

Explanation of Solution

Person C has a realized loss of $30,000 (4). Person C has no recognized loss, since § 351 disallow losses.

Working note:

(4)Calculate the Person C’s realized loss:

$\begin{array}{c}\text{Realized}\text{loss}\text{=}\text{Basis}\text{of}\text{property}-\text{Value}\text{of}\text{Corporation}\text{E'stock}-\text{Boot}\text{received}\\ \text{=}\text{\$400,000}-\text{\$350,000}-\text{\$20,000}\\ \text{=}\text{\$30,000}\end{array}$

e.

To determine

Ascertain Person C’s basis in the Corporation E’s stock.

Explanation of Solution

Person C’s basis in the Corporation E’s stock is $380,000 (5).

Working note:

(5)Calculate Person C’s basis in the Corporation E’s stock:

$\begin{array}{c}\text{Person}\text{C's}\text{basis}\text{=}\text{Basis}\text{in}\text{the}\text{property}-\text{Boot}\text{received}\\ \text{=}\text{\$400,000}-\text{\$20,000}\\ \text{=}\text{\$380,000}\end{array}$

f.

To determine

Ascertain Corporation E’s basis in the machinery and equipment.

Explanation of Solution

Corporation E’s basis in the machinery and equipment is $400,000 (Courtney’s basis).

g.

To determine

Ascertain Person Z’s realized and recognized gain (or loss)

Explanation of Solution

Person Z has a realized gain of $30,000 (6). Person Z’s recognized gain is also $30,000, the lesser of realized gain of $30,000 or boot received of $100,000.

Working note:

(6)Calculate the amount of realized gain:

$\begin{array}{c}\text{Realized}\text{gain}\text{=}\left[\left(\text{Value}\text{of}\text{Corporation}\text{E's}\text{stock+}\text{Boot}\text{received}\right)-\text{Basis}\right]\\ \text{=}\left[\left(\text{\$1,200,000+\$100,000}\right)-\text{\$1,270,000}\right]\\ \text{=}\text{\$30,000}\end{array}$

h.

To determine

Ascertain Person Z’s basis in the Corporation E’s stock.

Explanation of Solution

Person Z’s basis in the Corporation E’s stock is $1,200,000(7).

Working note:

(7)Calculate Person Z’s basis:

$\begin{array}{c}\text{Person}\text{Z's}\text{basis}\text{=}\left[\left(\text{Basis}\text{in}\text{the}\text{land}\text{and}\text{bulding}\text{+}\text{Gain}\text{recognized}\right)-\text{Boot}\text{received}\right]\\ \text{=}\left[\left(\text{\$1,270,000+\$30,000}\right)-\text{\$100,000}\right]\\ \text{=}\text{\$1,200,000}\end{array}$

i.

To determine

Ascertain Corporation E’s basis in the land and building.

Explanation of Solution

Corporation E’s basis in the land and building is $1,300,000.

Working note:

Calculate Corporation E’s basis:

$\begin{array}{c}\text{Corporation}\text{E's}\text{basis}\text{=}\text{Person}\text{Z's}\text{basis}\text{+}\text{Gain}\text{recognized}\\ \text{=}\text{\$1,270,000}\text{+}\text{\$30,000}\\ \text{=\$1,300,000}\end{array}$