1. For many years, David operated a sole proprietorship dry cleaning business with Linda, his most valued employee at his side. To dissuade Linda from quitting during the pandemic of 2020, David said that he would make her a 25% owner of the business as a reward for her loyalty to the business over the years. Based on that promise, Linda stayed on as an employee. In November of 2020, David formed DL Cleaners, Inc. a C-Corporation by transferring his dry cleaning machines and storefront to the corporation. He had an adjusted basis in the property transferred of $100,000 with a fair market value of $400,000. David got 75 shares of stock and Linda got 25.

What are the tax consequences to David and to Linda. Explain.

2. Keyarrow transfers land with adjusted basis of$350,000 (fair market value of $600,000) to a C-Corporation that she was forming in exchange for 100% of the stock. The land had a mortgage on it in the amount of $500,000 which is fully assumed by the corporation. The mortgage proceeds were used to develop the land by building a small convenience store on it.

What are the tax consequences of this transfer and what is Keyarrows basis in the Corporation at the end of the transaction?