Question

Six years ago, Donna purchased land as an investment. The land cost $150,000 and is now worth $480,000. Donna plans to transfer the land to Development Corporation, which will subdivide it and sell individual tracts. Development's income on the land sales will be ordinary in character. Read the requirements Requirement a. What are the tax consequences of the asset transfer and land sales if Donna contributes the land to Development in exchange for all its stock? Donna recognizes no gain or loss on the transfer of land to Development Corporation $ 150,000. All gain on the subsequent sales will be ordinary income Development's basis in the land will be to Development pre-contribution gain that accrued prior to Donna's transfer and the This alternative results in the post-contribution profit earned from subdividing the land Requirement b. In what alternative ways can the transaction be structured to achieve more favorable tax results? Assume Donna's marginal tax rate for capital gains is 23.8% (20% + 3.8% on net investment income), and Development's tax rate is 21% O A. Donna could transfer the land to Development in exchange for stock and debt instruments equal to her realized gain. In this case, Donna would recognize a long-term capital gain and Development's basis in the land would be the FMV of the land. The pre-contribution capital gain (net of any capital losses that Donna has recognized) is taxed at the applicable capital gains tax rate (in this case, 23.8%, including the 3.8% net investment tax). The step-up in basis permits Development to use the additional basis to offset income earned from subdividing the land that otherwise would be taxed at a 21% marginal tax rate. O B Donna could find another investor who is willing to contribute property valued at $150,000 in exchange for 50% of the stock of the corporation OC. There are no alternatives that will allow Donna to avoid Sec. 351 O D Donna could elect out of the Sec. 351 provisions. By including an election with her timely filed income tax return in the year of the transfer, Donna can avoid the Sec. 351 provisions.

Answer 1

Option D:

As per sec 351, when a property is transferred to a corporation by a person(s) in exchange for stocks in the corporation and after exchange i.e, immediately, the transferor is in control of the corporation then it is not subjected to federal income tax provisions.

In the given scenario, as the land is transferred to corporation in exchange for all of its stocks, as having controlling authority, so the transfer qualifies for tax free treatment.