Final answer:
Meg will recognize neither gain nor loss on the contribution of her machinery to Frost corporation in exchange for stock, since losses are not recognized on transfers treated under Section 351 of the Internal Revenue Code.
Step-by-step explanation:
The question pertains to the recognition of gain or loss for tax purposes when property is contributed to a corporation in exchange for stock. In the case of Meg, who contributes machinery to the Frost corporation, Section 1231 of the tax code governs the tax treatment of depreciable property used in a trade or business and held for more than one year.
Considering the information provided, Meg contributes machinery with an adjusted basis of $35,000 and a fair market value (FMV) of $30,000 for 30 shares of Frost stock. Typically, no gain or loss is recognized on the transfer of property to a corporation in exchange for its stock (as long as control is maintained after the exchange, per Section 351 of the Internal Revenue Code).
However, if the FMV is less than the adjusted basis, as in Meg’s case, a loss on the transaction would not be recognized for tax purposes because losses are only recognized on sales or exchanges, and Section 351 treats such transfers as neither. Therefore, Meg's recognized gain is $0, and her recognized loss is also $0 on the exchange.