[Anonymous]

Can anyone help explain the below Sim?

Gimmick, Inc., is a taxable domestic C corporation in the business of manufacturing and selling goods. As of January 1, 2015, Gimmick had 2,000 issued and outstanding shares. Snap owned 1,575 shares, Sylvia owned 300 shares, and Greg owned 125 shares. Snap, Sylvia, and Greg are not related to each other.  Gimmick had $750,000 of current and accumulated earnings and profits for 2015. In 2015, Gimmick paid dividends of $100 per share on August 30.

On September 30, 2015, Kim received from Gimmick 250 shares of Gimmick treasury stock and $25,000 in cash in exchange for an office building. Gimmick had redeemed the stock from Greg on October 31, 2013, for $250,000. The stock has a $100-per-share par value and had a FMV of $350,000 on September 30, 2015. The FMV of the office building was $500,000, and Kim’s adjusted basis in it was $275,000. The building was subject to a $125,000 mortgage, and there was $25,000 of Sec. 1250 recapture inherent in the property. The exchange was for a valid business purpose and not to avoid taxes. Kim had acquired the property on October 31, 2003.

Each of the following items refers to the September 30 transaction. Enter the appropriate amounts in the shaded cells below. Round answers to the nearest dollar. If no entry is necessary or the answer is zero, enter a zero (0). Assume that the stock redeemed from Greg in 2013 is treated as issued but not outstanding on January 1, 2015, and that not all of Greg’s stock was redeemed in 2013.

1. Gain recognized by Kim = ?

My calculation for Kim: Stk FMV 250K (250 * 100) + Cash 25K + Liab relieved 125K = Net received 400K

400K – 275 (AB) = 127K gain.

Correct answer:

$225,000. Kim is not a person exchanging property for stock who owns 80% or more of the corporation immediately after the exchange. Kim’s realized gain is $225,000 ($350,000 FMV of stock + $25,000 cash + $125,000 liability on property – $275,000 adjusted basis). Since a nonrecognition provision does not apply, all of the realized gain is recognized.

So, why is the FMV of stock = $350K? or how is it computed? I tried 350K/250 T/S = $1400/sh.

Are the share price related to Greg’s redemption?

I am lost.

Please advise. Thanks

[Anonymous]

This SIM is tough. If I may guess, this was a pretest SIM from the past CPA tests. I hope you'll be able to get some help from our experts here.

Where did you get this question? Is there any other explanation that was provided in the solution?

[Bnots]

The stock has a $100 per share PAR value. There's no trick to figuring out where the $350,000 comes from; the problem is telling you that's what those 250 shares are worth on September 30, 2015.

[Anonymous]

Thanks Bnots,

I must be tired and blind last night as I kept on thinking that the 350K was in reference to the redemption from Greg. Man, I am a fool!! I was up to 1 am trying to figure it out. Lol

Amor D,
These data has four other questions on the follow up from Gleim Sims for this particular study unit that I just took and completely bombed out.

Many thanks to both.

[Author]

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