Problem:

2 years ago Jorge transferred property he had employed in his solitary proprietorship to Flycatcher Corporation, a recently formed corporation, for 50 shares of Flycatcher stock. The property had the adjusted basis of $300,000 and the fair market value of $800,000. 6 months later Jorge’s friend, Polly, transferred property she had employed in her solitary proprietorship to Flycatcher Corporation for 50 shares of Flycatcher stock and cash of $100,000. Her property had adjusted basis of $150,000 and the value of $900,000. Both Jorge and Polly serve on Flycatcher’s board of the directors. Additionally, Polly has a contract with Flycatcher to carry out consulting services for corporation. In the recent year, Flycatcher Corporation redeems all of Polly’s Flycatcher stock for property with probable value of $1.4 million. What are the tax issues for Polly and Flycatcher?