China Airlines and India Airlines were both publicly traded companies. This year, the two companies agreed to merge into a new airline titled "ChIndia Airlines". Hayley owned 1,000 shares of India Airlines. Her basis in those shares is $5,000. Pursuant to the merger, Hayley exchanged her 1,000 shares of India for 500 shares of ChIndia Airlines shares. The ChIndia shares are worth $11,000. If the merger of China and India qualifies as a reorganization for federal tax purposes, how much capital gain must Hayley recognize on her 2015 federal tax return? [Review pages 506-507]
A. $0 and her basis in the ChIndia shares is $5,000.
B. $0 and her basis in the ChIndia shares is $11,000.
C. $6,000 and her basis in the ChIndia shares is $11,000.
D. $6,000 and her basis in the ChIndia shares is $5,000.
A. $0 and her basis in the ChIndia Shares is $ 5,000.
Here, the reason for recognizing $ 0 as Capital Gain is that the merger has taken place and she has received Share of merged company and not any cash in lieu of Share that she already possessed in India Airlines.
Also she has not sold any of the shares received in ChIndia Airlines so there will not be occurrence of any Capital Gain Tax.
Here the base will be $5000 which was the value of shares she owned in India Airlines so that when she will be selling the shares of ChIndia Airlines she ends up paying actual Capital gain tax.
China Airlines and India Airlines were both publicly traded companies. This year, the two compani...
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