This Year D Transferred Property Worth $10,000 (Basis $6,000) to a Newly

question 6

Multiple Choice

This year D transferred property worth $10,000 (basis $6,000) to a newly formed corporation in exchange for all of its stock worth $10,000.

• A)D realizes a $4,000 gain which is not recognized.In addition, D will never pay any tax on this gain.Congress elected to forgive taxes in this instance to ensure that tax considerations do not interfere with the choice of business form.
• B)D realizes a $4,000 gain which is not recognized.The gain escapes tax only temporarily.
• C)D realizes a $4,000 gain which must be recognized at the time of the exchange.When the shareholder has income, it must be reported.
• D)D realizes a gain of $4,000.In this case, the gain must be recognized under the continuity of interest doctrine.

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Definitions:

Binominal Model

A mathematical model used to price options by considering the possible prices of the underlying asset at expiration.

Strike Price

Strike price is the fixed price at which the holder of an options contract can buy (in case of a call option) or sell (in case of a put option) the underlying asset.

Risk-Free Rate

The rate of return on an investment with zero risk, typically represented by the yield on government securities like U.S. Treasury bonds.

Recessionary Gap

The situation where an economy's real GDP is less than its potential GDP, indicating underutilized resources and economic slack.