Jane and Walt form Yellow Corporation. Jane transfers equipment worth $950,000 (basis of $200,000) and cash of $50,000 to Yellow Corporation for 50% of its stock. Walt transfers a building and land worth $1,050,000 (basis of $400,000) for 50% of Yellow's stock and $50,000 in cash.
A) Jane recognizes no gain? Walt recognizes gain of $50,000.
B) Jane recognizes a gain of $50,000? Walt has no gain.
C) Neither Jane nor Walt recognizes gain.
D) Jane recognizes a gain of $750,000? Walt recognizes gain of $650,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Both Jane and Walt are contributing assets to the corporation in exchange for stock. Under section 351 of the Internal Revenue Code, a transfer of property to a corporation in exchange for stock is not taxable as long as certain conditions are met. One of the conditions is that the transferor must receive stock that has a "substantial" value compared to the value of the property transferred. Here, Jane and Walt are each receiving 50% of the stock, which is considered substantial. Therefore, neither Jane nor Walt recognizes gain or loss on their transfers of property to Yellow Corporation. However, Walt has to recognize gain on the $50,000 in cash he received because it is not considered "boot" in a tax-free exchange. Jane does not have to recognize any gain on her transfer because the value of her equipment is less than the value of the stock she received.

Jane and Walt Form Yellow Corporation