Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of
$50,000, while Maria transfers a proprietary formula (basis of $0; fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.

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 or persons are in control (meaning ownership of at least 80% of both the stock and voting power) of the corporation. In this scenario, since Gabriella and Maria are exchanging property (cash and a proprietary formula) for stock and together they control the corporation immediately after the exchange, neither would recognize gain on the transfer.

Gabriella and Maria Form Luster Corporation with Each Receiving 50