Penny, Miesha, and Sabrina transfer property (FMV 150,000, adjusted basis $90,000) to Owl Corporation for 75% of its stock. Nancy, their attorney, receives 25% of the stock in Owl worth $50,000) for legal services rendered in incorporating the business. Penny, Miesha, and Sabrina wish to minimize any tax liability resulting from the transfer.

a. Apply section 351 to the transaction above.

b. What are the tax consequences for the shareholders (e.g., recognized gain, loss, income) as a result of the transfer?

c. How should this transaction have been handled? Why?