Question

In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville, Tennessee, the city donates land (fair market value of $400,000) and cash of $100,000 to the corporation. Several months after the donation, Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land.A. Yellow recognizes income of $100,000 as to the donation.B. Yellow has a zero basis in the land and a basis of $450,000 in the plant.C. Yellow recognizes income of $500,000 as to the donation.D. Yellow has a zero basis in the land and a basis of $350,000 in the plant.E. None of the above.

Answer 1

C) Yellow recognizes income of $500,000 as to the donation.

Step-by-step explanation:

Yellow Corporation is not a non-profit charity that uses donations for humanitarian purposes, so it cannot record the land (worth $400,000) and the money ($100,000) as donations. They must recognize both as income and are required to pay income taxes for them.

If the land had not been given to them for free plus the cash, they would have needed to purchase the land either in the same location or somewhere else.