Nick and Nahiyan formed Nerrisa Corporation. They transferred appreciated property to the corporation with each receiving 50 shares of Nerrisa stock. Shortly after the formation, Nick gave 25 shares to his son. He did not promise the gift before the formation. Determine which is correct.

The formation was a Section 351 transaction but the shareholders failed the control test by the gift of stock by Nick.

No shareholders meet the requirements of Section 351 at formation.

Nick needs to recognize gain on the exchange.

The transfer by both shareholders met the requirements of Section 351.