Gabriella and Juanita form Luster Corporation. Gabriella transfers cash of $50,000 for 50 shares of stock, and Juanita transfers information concerning a proprietary process (basis of zero and fair market value of $50,000) for 50 shares of stock.
A) The transfers to Luster are fully taxable to both Gabriella and Juanita.
B) Juanita must recognize gain of $50,000.
C) Because Juanita is required to recognize gain on the transfer, Gabriella also must recognize gain.
D) Neither Gabriella nor Juanita will recognize gain on the transfer.
E) None of these.

Question

Quizplus · Accepted Answer

Under Section 351 of the Internal Revenue Code, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation, and immediately after the exchange, such person(s) are in control (meaning they own at least 80% of the stock) of the corporation. Both Gabriella and Juanita are transferring property (cash and intellectual property, respectively) for stock and will control the corporation immediately after the exchange, so neither will recognize gain on the transfer.

Gabriella and Juanita Form Luster Corporation