Sergio and Chris Agree to Combine Their Sole Proprietorships and Form

Multiple Choice

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?
I.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.
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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.