Rich Owns 60 of the 100 Outstanding Shares of Rainbow

question 70

Essay

Rich owns 60 of the 100 outstanding shares of Rainbow Corporation's stock and 80 of the 100 outstanding shares of Oz Corporation's stock. Rich's basis in his Rainbow shares is $12,000, and his basis in his Oz shares is $8,000. Rich sells 30 of his Rainbow shares to Oz Corporation for $50,000. At the end of the year of the sale, Rainbow and Oz Corporations have E&Ps of $25,000 and $40,000, respectively.
a)What is the amount and character of Rich's gain or loss?
b)What is Rich's basis in his remaining shares of the Rainbow and Oz stock?
c)How does the sale affect the E&Ps of Rainbow and Oz Corporations?
d)What basis does Oz Corporation take in the Rainbow shares it purchases?
e)How would your answer to part (a)change if Rich owns only 50 shares of the 100 outstanding shares of Oz Stock?

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Definitions:

Proximity

The physical closeness or distance between people or objects, which can influence perceptions, attitudes, and behaviors.

Figure-ground

A visual perception principle that describes how humans separate an object (the figure) from its surrounding area (the ground).

Reversible Figures

Visual illusions that can be perceived in more than one way, switching between alternative interpretations of the same image.

Gestalt Principles

A theory in psychology suggesting that people naturally organize their perceptions according to certain patterns.