Final answer:
Hermione might realize and recognize a gain or loss upon transferring property to a corporation, depending on her adjusted basis and the property's value. If she meets IRC §351 requirements, she could defer recognition of this gain or loss. Otherwise, she would likely recognize it on her taxes.
Step-by-step explanation:
Understanding Corporation Formation and Tax Implications
When Hermione transfers property to a corporation during its formation, she may encounter different tax outcomes: a realized gain or loss and a recognized gain or loss. The realized gain or loss is simply the difference between the property's value transferred to the corporation and Hermione's adjusted tax basis (cost) in the property. However, the recognized gain or loss is the amount of this gain or loss that she is required to report on her taxes.
Under the tax provision for forming corporations (IRC §351), if Hermione, along with others, controls the corporation immediately after the exchange and certain other conditions are met, she might not recognize any gain or loss. 'Control' typically means owning at least 80% of the corporation. Not recognizing the gain or loss does not mean it disappears; instead, it is deferred until the property is sold or otherwise disposed of.
However, if the conditions for a tax-deferred exchange under IRC §351 are not met, Hermione would likely recognize a gain or loss equal to the difference between her basis in the transferred property and its fair market value. Any recognized gain might be taxable and the recognized loss may be deductible, depending on her specific tax situation and prevailing tax laws. These concepts are crucial for understanding the tax implications of forming a corporation.