Ula purchased stock in Purple, Inc, 6 years ago for $150,000 . Purple has assets with a value of $225,000 ($175,000 basis) and liabilities of $60,000 . Purple transfers $200,000 of assets and all of its liabilities to White Corporation in exchange for White common stock. Purple distributes the White stock and its $25,000 remaining asset (cash) to Ula in exchange for all of her Purple stock

Question

Purple then liquidates. How is this transaction treated for tax purposes?
a. Ula recognizes a $15,000 gain on the exchange.
b. Ula recognizes a $25,000 gain on the exchange.
c. Ula recognizes a $25,000 gain and Purple recognizes a $25,000 gain on the exchange.
d. Purple recognizes a $50,000 gain on the exchange.

Answer 1

a
RATIONALE: The White stock received by Ula is worth $140,000 ($225,000 FMV – $25,000 cash retained – $60,000 liabilities). Ula reports a realized gain of $15,000 ($140,000 stock received + $25,000 cash – $150,000 stock basis). The gain is fully recognized since the realized gain is less than the boot received.