Question

Celeste transferred 100 percent of her stock in Supply Chain Company to Marketing Corporation in a Type A merger. In exchange, she received stock in Marketing with a fair market value of $580,000 plus $580,000 in cash. Celeste's tax basis in the Supply Chain stock was $1,385,000. What amount of loss does Celeste recognize in the exchange and what is her basis in the Marketing stock she receives?

Multiple Choice

• $225,000 loss recognized and a basis in Marketing stock of $1,385,000.

• No loss recognized and a basis in Marketing stock of $1,385,000.

• $225,000 loss recognized and a basis in Marketing stock of $805,000.

• No loss recognized and a basis in Marketing stock of $805,000.

Answer 1

Correct answer is Option D) No loss recognized and a basis in Marketing stock of $805,000.

Explanation

Basis in Marketing stock = Carryover Basis - Amount received as Cash

= $ 1,385,000 - $ 580,000

= $ 805,000

If She sells stocks at $ 580,000 , She will incur a loss of $ 225,000 (805000 - 580000)