On February 2, Mr. Eugene Pomeroy transferred all the assets of his sole proprietorship (Pomeroy’s Ski Shop) to a newly created corporation, Pomeroy Ski Inc. In exchange for the business assets, Mr. Pomeroy received all 1,000 shares of the corporation’s newly issued voting common stock. On February 3, Mr. Pomeroy gave 100 shares of this stock to each of his five children and three grandchildren, leaving him with 200 shares.
Research Issue
Does Mr. Pomeroy’s exchange of business assets for corporate stock qualify as a nontaxable exchange even though he reduced his ownership interest from 100 percent to only 20 percent on the day after Pomeroy Ski Inc. was incorporated?