Four partners together bought a tract of 3,000 acres of land, for which they paid $15,000. This was held for a period, during which the value of the land materially increased. The tract was then platted, and, after deducting roads and waste land, 500 farms of 5 acres each were laid off. The immediate minimum selling price for these was estimated at $100 each, or $50,000 for all. The four partners formed a corporation, transferred the property to it, and issued capital stock in payment for the property to the amount of $50,000, and this stock was divided equally among them. To provide for current expenses, each incorporator paid in a certain sum, which was treated as a current loan and placed to his credit. As farms were sold, the proceeds were used in making roads and other improvements, and after a few months it was found possible to sell the farms at prices ranging from $600 to $750 each.
It will readily be seen that the conditions in this case differ radically from those previously considered, and that the results of this difference are far-reaching. So far as the company is concerned, the cost of the land equals the amount of capital stock issued. The partners, however, sold the land to the corporation and received $50,000 worth of stock in exchange, thereby realizing a profit of $35,000 on the transaction. In preparing their returns for the federal income tax, it would be necessary for each partner to report his individual share of this gain.