A, together with 50 other transferors, organizes a corporation with 100 shares of stock. A transfers $10,000 worth of stock in corporation X, listed on the New York Stock Exchange, in exchange for 50 shares of stock.
Each of the other 50 transferors transfers $200 worth of readily marketable securities in corporations other than X in exchange for one share of stock.
In determining whether or not diversification has occurred, all transfers will be taken into account. Therefore, diversification is present, and gain or loss will be recognized.
Unlike the de minimis case, the contributions of the 50 other transferors are large enough in the aggregate that all transfers are taken into account.
A contributes Corporation X stock while the others contribute different marketable securities, diversifying the transferors’ interests.
Because diversification occurs, the exchange is a transfer to an investment company under section 351(e)(1).
Section 351 does not shelter the exchange, so each transferor recognizes gain or loss on the contributed securities.
