Mel, Fred, and Mary form Canary Corporation.Both Mel and Fred contribute cash of $250,000, and Mary contributes land (basis of $100,000; fair market value of $300,000).Each transferor receives one-third of Canary's shares, and Mary also receives $50,000 in cash.Which, if any, of the following choices is a result of the incorporation?

Question

Quizplus · Accepted Answer

The land transferred by Mary has a fair market value of $300,000, but her basis in the land is only $100,000. When property is transferred to a corporation in exchange for stock, the corporation's basis in the property transferred is the same as the transferor's adjusted basis in the property. Therefore, Canary's basis in the land is $100,000.

Mary receives $50,000 cash in addition to her one-third interest in Canary. The cash received by Mary is not taxable since it is considered a return of her basis in the land.

The basis of Mary's Canary stock is equal to the amount of her contribution to the corporation, which is the fair market value of the land plus the cash received. Therefore, her basis in the Canary stock is $350,000.

Mel, Fred, and Mary Form Canary Corporation