Juan transferred 100 percent of his stock in Rosa Company to Azul Corporation in a Type B stock-for-stock exchange. In exchange, he received stock in Azul with a fair market value of $1,000,000. Juan's tax basis in the Rosa stock was $400,000. What amount of gain does Juan recognize in the exchange and what is his basis in the Azul stock he receives

no gain is realized by juan. His basis in the Azul stock he receives is also the same $400,000 tax basis

Explanation:

According to section 368 of the internal revenue code of 1986, a type B stock-for-stock involves when the stock of a target company is traded in exchange for a portion of the stock of an acquiring company. When this occurs, the acquiring company takes over the shareholder of the target company and the target company is no longer part of its shareholders. However, the target company will now hold a minority shareholder of the acquiring company

From the question, Juan transferred 100 percent of his Rosa Company's stock to Azul Corporation in exchange for stock in Azul valued at $1,000,000 (except juan sells his Azul stock).

Therefore no gain is realized by juan. His basis in the Azul stock he receives is also the same $400,000 tax basis in the Rosa stock transferred to Azul Corporation.

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