Holly, the sole shareholder of Peach

Corporation, has a basis for her Peach stock

of $500,000. As part of a 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

Hollys 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 Hollys recognized gain

resulting from the merger and the basis

for her new Pear stock?