Gabriella and Juanita form Luster Corporation,each receiving 50 shares of its stock.Gabriella transfers cash of $50,000,while Juanita transfers a secret process (basis of zero and a fair market value of $50,000).Neither Gabriella nor Juanita recognizes gain as a result of these transfers.

Question

Quizplus · Accepted Answer

Both cash and property can be used to contribute to the capital of a corporation. If property is transferred, the transferor recognizes gain or loss for the difference between the property's basis and its fair market value. However, if property is transferred in exchange for stock in a corporation and the transferor receives control under §368(c) of the Internal Revenue Code, the transferor may not recognize gain or loss, as is the case with the given scenario. Hence, both Gabriella and Juanita can receive their share of stock without recognizing gain or loss.

Gabriella and Juanita Form Luster Corporation,each Receiving 50 Shares of Its