Rick transferred the following assets and liabilities to Warbler Corporation. $\begin{array}{lrr} &&\text { Fair Market }\
&\text { Adjusted Basis }&\text { Value }\
\text { Building } & \$ 210,000 & \$ 225,000 \
\text { Equipment } & 45,000 & 75,000 \
\text { Trucks } & 15,000 & 30,000 \
\text { Mortgage (held for four years) on building } & 30,000 & 30,000
\end{array}$ ? In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000).
A)Rick has a recognized gain of $60,000.
B)Rick has a recognized gain of $75,000.
C)Rick's basis in the stock of Warbler Corporation is $270,000.
D)Warbler Corporation has the same basis in the assets received as Rick does in the stock.
E)None of the above.

Question

Quizplus · Accepted Answer

Rick's recognized gain is calculated as the lesser of the realized gain or the boot received. The realized gain is $75,000 (FMV of assets transferred $330,000 - adjusted basis $270,000). The boot received is $75,000 (cash received). Therefore, the recognized gain is $60,000 (realized gain $75,000 - mortgage $30,000).

Rick Transferred the Following Assets and Liabilities to Warbler Corporation