Rocky Is a Party to a Tax-Free Asset-For-Stock Reorganization

question 62

Multiple Choice

Rocky is a party to a tax-free asset-for-stock reorganization. As part of the transaction, Rocky exchanges 100% of the Hope Corporation stock with a $40,000 basis and a $50,000 FMV for Moth Corporation stock worth $40,000 and $10,000 cash. Hope Corporation is subsequently liquidated as part of the reorganization, with Moth receiving the Hope assets and liabilities. Rocky is

• A)not required to recognize any gain or loss.
• B)required to recognize capital gain or dividend income of $10,000, depending on Hope Corporation's current and accumulated E&P and Rocky's postacquisition interest in Moth Corporation.
• C)required to recognize dividend income of $10,000 if Hope Corporation's current and accumulated E&P is at least $10,000.
• D)able to recognize capital gain income of $10,000 without regard to his post-acquisition interest in Moth Corporation.

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Definitions:

Accounting Equation

Assets equal liabilities plus owners’ equity.

Net Income

The total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings.