Choice "c" is correct. As a general rule, a shareholder who contributes
property to a corporation in exchange for common stock will not recognize gain
or loss if immediately after the transaction when the transferring shareholders
(there can be more than one transferor) own at least 80% of the corporation and
the shareholder does not receive any boot. In this case, Dole as the sole
shareholder owns more than 80% but receives boot, cash of $40,000. Therefore,
Dole will recognize gain to the lesser of cash received or realized gain as
follows:
Amount Realized* | $ 100,000 |
Adjusted basis** | (35,000) |
Realized Gain | $ 65,000 |
|
|
Recognized gain = Lesser of realized gain ($65,000) or boot
received ($40,000) | $ 40,000 |
*Amount Realized = Cash $40,000 + Common stock $60,000
** Adjusted basis = the adjusted basis (NBV) of the building =
$35,000
