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.
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?
b. In what alternative ways can the transaction be structured to achieve more favorable tax results? Assume Donna’s marginal tax rate is 39.6%, and Development’s marginal tax rate is 34%.