Question - Assume Short time Corporation (the "corporation") has been in existence for a short time and a minority shareholder who holds both voting and nonvoting common stock of the corporation tells you that she transferred to the corporation two shares of voting common stock in exchange for four shares of nonvoting common stock. You should assume that the total fair market value of the four shares of nonvoting common stock received by the shareholder (which is the same as the total fair market value of the two shares of voting common stock transferred to the corporation) is greater than the shareholder's basis in the voting common stock transferred to the corporation. The exchange was not pursuant to a plan of reorganization.
a. Was the gain realized by the shareholder on the exchange recognized by the shareholder? Yes or no, and why or why not?
b. Did the corporation recognize any gain as a result of the transaction?