Question

This year, John, Meg and Karen form Frost corporation. John contributes land purchased as an investment four years ago for $15,000 that has a $30,000 FMV in exchange for 30 shares of Frost stock. Meg contributes machinery (sec. 1231 property) purchased four years ago and used in her business having a $35,000 adjusted basis and a $30,000 FMV in exchange for 30 shares of Frost stock. Karen contributes services worth $20,000 in exchange for 20 shares of Frost stock. What is the amount of John's recognized gain or loss?

Answer 1

John does not recognize any gain or loss on the contribution of his land valued at $30,000 in exchange for 30 shares of Frost Corporation under IRC Section 351, as it appears to be a non-taxable exchange.

Step-by-step explanation:

John initially purchased land for $15,000, which he is now contributing to Frost Corporation for 30 shares of stock currently valued at $30,000 FMV. This transaction results in a situation where John is exchanging his property for company stock, which in taxation is often considered a like-kind exchange and may be non-taxable under certain Internal Revenue Code (IRC) sections. However, for this scenario, we assume general tax principles without special provisions.

Since John did not receive any boot (cash or other property) in the exchange, and the contribution is solely for stock in the corporation, under IRC Section 351, he generally would not have to recognize any gain or loss on this exchange. Under such section, 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 of the corporation. Yet, the student should further investigate the specifics of tax law or consult a tax professional as tax scenarios can have varied outcomes depending on the circumstances.