Question

Joe contributed assets to Yellow Corporation in a valid IRC 351 contribution: Asset Basis FMV Land $350,000 $250,000 Equipment $100,000 $150,000 Total $450,000 $400,000 16 Months after the contribution, Yellow liquidates and distributes the assets to Joe. At the time of liquidation, the Land was worth $200,000. Joe owns less than 50% of Yellow. Yellow will recognize a loss of $0 $150,000 $100,000 $50,000

Answer 1

Yellow Corporation will recognize a loss of $100,000 upon liquidation based on the change in FMV of the land asset relative to its basis at the time of the IRC 351 contribution that Joe made, as Joe owns less than 50% of the corporation.

Step-by-step explanation:

The subject question pertains to the Internal Revenue Code (IRC) Section 351, which deals with the transfer of property to a corporation by one or more persons. Joe has made a valid IRC 351 contribution to Yellow Corporation, but the company is liquidating and distributing assets back to him after 16 months. Since Joe owns less than 50% of Yellow Corporation, Section 351 applies, which generally allows for the deferral of gain or loss recognition on the transfer of assets to a corporation in exchange for stock. Because Yellow Corporation is liquidating and Joe is not a controlling shareholder, the corporation may recognize losses on the assets it is liquidating only to the extent that the fair market value (FMV) at the time of contribution was less than the adjusted basis.

In this case, the land's FMV at the time of contribution was $250,000, and its adjusted basis was $350,000. Therefore, Yellow can recognize a loss of $100,000. For the equipment, there is no loss as its FMV exceeded its basis at the time of contribution. Hence, upon liquidation, Yellow Corporation will recognize a loss of $100,000.