Sergio and Chris Agree to Combine Their Sole Proprietorships and Form

Sergio and Chris agree to combine their sole proprietorships and form a corporation.Sergio will contribute cash of $20,000 and business property worth $120,000 (adjusted basis of $50,000) for a 25% interest.Chris will contribute cash of $200,000 and business property worth $220,000 (adjusted basis of $200,000) for a 75% interest.Which of the following statements concerning the tax treatment of Sergio and Chris's exchange of assets is/are correct?
L.
Because neither owner owns more than 80% of the stock in the corporation,the transfers do not qualify for tax-free treatment.
II.Based on the wherewithal-to-pay concept,each owner is taxed on the cash they contributed to the corporation.
III.Sergio will recognize a $70,000 gain and Chris will recognize a $20,000 gain.
IV.No gain or loss is recognized on the exchange.

A) Only statement IV is correct.
B) Statements I and III are correct.
C) Only statement II is correct.
D) Only statement III is correct.
E) None of the statements are correct.