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 these.

Question

Quizplus · Accepted Answer

Under Section 351 of the Internal Revenue Code, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation, and immediately after the exchange, such person or persons are in control (meaning they own at least 80% of the stock) of the corporation. Both Jane and Walt transfer property to Yellow Corporation in exchange for 50% of its stock each, thus collectively they are in control of the corporation. However, since Walt also receives $50,000 in cash (boot), he recognizes gain to the extent of the boot received, which is $50,000. Jane does not receive any boot and therefore recognizes no gain.

Jane and Walt Form Yellow Corporation