Question

Jermaine owns all 200 shares of Peach Corporation stock valued at $50,000. Kenya, a new shareholder, receives 200 newly issued shares from Peach Corporation in exchange for inventory with an adjusted basis of $40,000 and an FMV of $50,000. Which of the following statements is correct?
A.Kenya may defer the recognition of any tax until the stock is sold.
B.The transaction results in $10,000 of capital gain for Kenya.

C.The transaction results in $10,000 of ordinary income for Kenya.

D.No gain will be recognized by Kenya.

Answer 1

Answer:

C. The transaction results in $10,000 of ordinary income for Kenya.

Explanation:

Kenya has received 200 newly issued shares from Peach Corporation which worth $50,000 in exchange for inventory which valued at $40,000. There is ordinary income of $10,000 to Kenya. This income is not classified as capital gains because this income is not received by selling the shares.

The correct answer is C, transaction will result in $10,000 of ordinary income for Kenya.