Road Corporation is owned equally by four shareholders. It conducts activities through two operating divisions: the road construction division and meat packing division. To segregate the two activities into distinct corporations, Road transfers the assets and liabilities of the meat packing division (60% of Road’s total net assets) to Food Corporation in exchange for all of Food’s single class of stock. The assets of the meat packing division have a $2.75 million FMV and a $1.1 million adjusted basis. Its liabilities total $500,000. Road distributes the $2.25 million of Food stock (90,000 shares) ratably to each of the four shareholders.
a. What is the amount of Road’s recognized gain or loss on the asset transfer? On the distribution of the Food stock?
b. What are the amount and character of each shareholder’s recognized gain or loss on the distribution? (Assume each shareholder’s basis in Road stock is $200,000.)
c. What is the basis of each shareholder’s Road and Food stock after the reorganization? (Assume the Road stock is worth $1.5 million immediately after the distribution.)