Holly, the sole shareholder of Peach Corporation, has a basis for her Peach stock of $500,000. As part of a statutory merger of Peach Corporation into Pear Corporation, Holly exchanges her Peach stock for Pear stock with a fair market value of $1,000,000 and $200,000 in cash. Holly owns a 40 percent interest in Pear Corporation as a result of the merger transaction. Both Peach Corporation and Pear Corporation have accumulated earnings and profits in excess of

$2 million.

a. What is the amount and character of Holly’s recognized gain resulting from the merger and the basis for her new Pear stock?

b. Assume the same facts except that the Pear stock received in the merger gives Holly a 60 percent interest in Pear Corporation. What is the amount and character of Holly’s recognized gain resulting from the merger and the basis for her new Pear stock?