Requirement #3

Peggy owns 50% of the stock of Oakdale Corporation. She and the other 50% shareholder, Janet, have decided that additional contributions of capital are needed if Oakdale is to remain successful in its competitive industry. The two shareholders have agreed that Peggy will contribute assets having a value of $200,000 (adjusted basis of $15,000) in exchange for additional shares of stock. After the transaction, Peggy will hold 75% of Oakdale Corporation and Janet's interest will fall to 25%.

1. What gain is realized on the transaction? How much of the gain will be recognized?
2. Peggy is not satisfied with the transaction as proposed. How will the consequences change if Janet agrees to transfer $1,000 of cash in exchange for additional stock? In this case, Peggy will own slightly less than 75% of Oakdale and Janet's interest will be slightly more than 25%.
3. If Peggy still is not satisfied with the result, what should be done to avoid any gain recognition?