Reference no: EM133131770

Question - Rx Corp wants to acquire all the stock of Vit B corp. Vit B is wholly owned by Honey, an individual shareholder who has owned the stock for 5 years. Honey's basis in Vit B is $75. Vit B's assets are worth $200 and the adjusted basis of those assets is $40. If Rx gives Honey voting stock in Rx worth $250 in exchange for all the Vit B shares:

1. How much gain or loss does Honey recognize on the transaction?

2. What is Honey's adjusted basis in the Rx shares she receives?

3. What is Honey's holding period in the Rx shares she receives?

4. What is Rx's adjusted basis in the Vit B shares it receives?

5. What is Rx's holding period in the Vit B shares?

6. What is Vit B's basis in the original Vit B assets which it continues to own?

7. What if anything happens to Vit B's earnings and profits?

8. Would Rx be able to make a section 338 election in connection with the acquisition? (Yes or No)

9. Briefly explain why Rx could or could not make a section 338 election on the acquisition of Vit B?

10. Suppose that Rx originally owned for several years 78% of Vit B. Honey owned 6% and the other 16% was owned by other shareholders who owned 4% each. Rx gives Honey $20,000 worth of Rx voting stock for her 6% of Vit B. Assume this the fair market value of the Vit B shares. Does Honey recognize gain on the exchange? Yes or No

11. Briefly explain why Honey does or does not recognize gain on the exchange in the prior question?