Linda and Cynthia decide to form a corporation in a transaction that meets the requirements of Sec. 351. Linda transfers machinery she has held for several years with a basis of $45,000 and a fair market value of $70,000 for 60% of the new corporation’s stock. The machinery was originally purchased for $100,000 and is subject to a liability of $10,000 that the corporation has agreed to assume. Cynthia transfers land held for investment with a basis of $32,000 and a fair market value of $40,000 for the remaining 40% of the corporation’s stock.
a. Determine Linda’s basis in her shares and any gain or loss recognized.
b. Determine Cynthia’s basis in her shares and any gain or loss recognized.