I noticed that Sec 83(h) doesn’t say anything about this capital contribution we’ve been talking about. Only the regulation spells out that theory:
(1)Transfers. If a shareholder of a corporation transfers property to an employee of such corporation or to an independent contractor (or to a beneficiary thereof), in consideration of services performed for the corporation, the transaction shall be considered to be a contribution of such property to the capital of such corporation by the shareholder, and immediately thereafter a transfer of such property by the corporation to the employee or independent contractor under paragraphs (a) and(b) of this section.
How is it that a Regulation can usurp a Code Section, like Sec 1001(c):
(c)RECOGNITION OF GAIN OR LOSS
Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized