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 cash.

Question

Quizplus · Accepted Answer

When forming a corporation, the general rule is that no gain or loss is recognized by the transferors if solely exchanging property for stock in a corporation and if they are in control of the corporation after the transfer. Control is achieved if the transferors own 80% or more of the total voting power and value of the corporation's stock.

In this case, both Jane and Walt transfer property for 50% of Yellow's stock, which means they each own 50% of the corporation and do not meet the control requirement. However, since they are solely exchanging property for stock, no gain or loss is recognized.

Therefore, Jane recognizes no gain and Walt recognizes a gain of $50,000 due to the excess cash he transferred compared to the adjusted basis of his property. Thus, the best choice is A.

Jane and Walt Form Yellow Corporation