A shareholder bought 2,000 shares of Zee Corporation for $90,000 several years ago.When the stock is valued at $200,000,Zee redeems these shares in exchange for 6,000 shares of Yea Corporation stock.This transaction meets the requirements of § 368.Which of the following statements is true with regard to this transaction?
A)The shareholder has a recognized gain of $110,000.
B)The shareholder has a postponed gain of $110,000.
C)The shareholder has a basis in the Yea stock of $200,000.
D)Gain or loss cannot be determined because the value of the Yea stock is not given.
E)None of the above are true.

Question

Quizplus · Accepted Answer

Since this transaction meets the requirements of §368, it is considered a tax-free exchange. Therefore, the shareholder has a postponed gain of $110,000, which will only be recognized when they sell the Yea Corporation stock. The shareholder's basis in the Yea stock will be $90,000, which is the same as their basis in the Zee Corporation stock. The value of the Yea stock is not relevant in determining the postponed gain.

A Shareholder Bought 2,000 Shares of Zee Corporation for $90,000