Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000 . How does Wanda treat this transaction on her tax return?
a. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $900,000.
b. Wanda recognizes a loss of $100,000 . Her Jupiter stock basis is $800,000.
c. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $700,000.
d. Wanda realizes a $200,000 loss of which $100,000 is recognized. Her Jupiter stock basis is $1 million.
e. None of the above.
e
RATIONALE: Wanda has a realized loss of $200,000; however, losses are not recognized in reorganizations. Her basis in her Jupiter stock will be $800,000 ($600,000 value of stock received + $200,000 postponed loss OR $900,000 – $100,000 cash received).
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