To Induce Yellow Corporation to Build a New Manufacturing Facility

Multiple Choice

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 these.