Question 1

In structuring the capitalization of a corporation,the tax law is neutral for the investor as to debt versus equity financing.

Accepted Answer

A) True 
 B)False

Question 2

Kirby and Helen form Red Corporation.Kirby transfers property,basis of $20,000 and value of $300,000,for 100 shares in Red Corporation.Helen transfers property,basis of $40,000 and value of $280,000,and provides legal services in organizing the corporation.The value of her services is $20,000.In return Helen receives 100 shares in Red Corporation.With respect to the transfers:

Accepted Answer

A) Kirby will recognize gain. 
B) Helen will not recognize any gain or income. 
C) Red Corporation will have a basis of $280,000 in the property it acquired from Helen. 
D) Red will have a business deduction of $20,000. 
E) None of the above. 
A) Kirby will recognize gain. 
B) Helen will not recognize any gain or income. 
C) Red Corporation will have a basis of $280,000 in the property it acquired from Helen. 
D) Red will have a business deduction of $20,000. 
E) None of the above.

Question 3

Gabriella and Juanita form Luster Corporation.Gabriella transfers cash of $50,000 for 50 shares of stock,while Juanita transfers information concerning a proprietary process (basis of zero and fair market value of $50,000) for 50 shares of stock.

Accepted Answer

A) The transfers to Luster are fully taxable to both Gabriella and Juanita. 
B) Juanita must recognize gain of $50,000. 
C) Because Juanita is required to recognize gain on the transfer, Gabriella also must recognize gain. 
D) Neither Gabriella nor Juanita will recognize gain on the transfer. 
E) None of the above. 
A) The transfers to Luster are fully taxable to both Gabriella and Juanita. 
B) Juanita must recognize gain of $50,000. 
C) Because Juanita is required to recognize gain on the transfer, Gabriella also must recognize gain. 
D) Neither Gabriella nor Juanita will recognize gain on the transfer. 
E) None of the above.

Question 4

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000; land by Tony (basis of $25,000 and fair market value of $35,000).Dove Corporation issues 400 shares of stock,200 each to Sarah and Tony.Thus,each receives stock in Dove worth $50,000.

Accepted Answer

A) Section 351 cannot apply since Sarah should have received 260 shares instead of only 200. 
B) Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred. 
C) Tony's basis in the stock of Dove Corporation is $50,000. 
D) As a result of the transfer, Tony recognizes a gain of $10,000. 
E) None of the above. 
A) Section 351 cannot apply since Sarah should have received 260 shares instead of only 200. 
B) Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred. 
C) Tony's basis in the stock of Dove Corporation is $50,000. 
D) As a result of the transfer, Tony recognizes a gain of $10,000. 
E) None of the above.

Question 5

In a § 351 transfer,a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000.Only $7,000 of the boot will be taxed to the shareholder.

Accepted Answer

A) True 
 B)False

Question 6

Albert transfers land (basis of $140,000 and fair market value of $320,000) to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000.Gold assumes Albert's mortgage on the land of $200,000.

Accepted Answer

A) Albert has a recognized gain on the transfer of $140,000. 
B) Albert has a recognized gain on the transfer of $80,000. 
C) Albert has a recognized gain on the transfer of $60,000. 
D) Gold Corporation has a basis in the land of $220,000. 
E) None of the above. 
A) Albert has a recognized gain on the transfer of $140,000. 
B) Albert has a recognized gain on the transfer of $80,000. 
C) Albert has a recognized gain on the transfer of $60,000. 
D) Gold Corporation has a basis in the land of $220,000. 
E) None of the above.

Question 7

Mitchell and Powell form Green Corporation.Mitchell transfers property (basis of $105,000 and fair market value of $90,000) while Powell transfers land (basis of $8,000 and fair market value of $75,000) and $15,000 of cash.Each receives 50% of Green Corporation's stock (total value of $180,000).As a result of these transfers:

Accepted Answer

A) Mitchell has a recognized loss of $15,000, and Powell has a recognized gain of $67,000. 
B) Neither Mitchell nor Powell has any recognized gain or loss. 
C) Mitchell has no recognized loss, but Powell has a recognized gain of $15,000. 
D) Green Corporation will have a basis in the land of $23,000. 
E) None of the above. 
A) Mitchell has a recognized loss of $15,000, and Powell has a recognized gain of $67,000. 
B) Neither Mitchell nor Powell has any recognized gain or loss. 
C) Mitchell has no recognized loss, but Powell has a recognized gain of $15,000. 
D) Green Corporation will have a basis in the land of $23,000. 
E) None of the above.

Question 8

When consideration is transferred to a corporation in return for stock,the definition of "property" is important because tax deferral treatment of § 351 is available only to taxpayers who transfer property.

Accepted Answer

A) True 
 B)False

Question 9

If a transaction qualifies under § 351,any recognized gain is equal to the value of the boot received.

Accepted Answer

A) True 
 B)False

Question 10

Carl and Ben form Eagle Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Eagle.Ben transfers proprietary information with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Eagle.Carl will have a tax basis of $50,000 in his stock in Eagle Corporation and Ben's basis in his stock will be zero.

Accepted Answer

A) True 
 B)False

Question 11

Kim,a real estate dealer,and others form Eagle Corporation under § 351.Kim contributes inventory (land held for resale) in return for Eagle stock.The holding period for the stock includes the holding period of the inventory.

Accepted Answer

A) True 
 B)False

Question 12

In general,the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer.

Accepted Answer

A) True 
 B)False

Question 13

Penny,Miesha,and Sabrina transfer property to Owl Corporation for 75% of its stock.Nancy,their attorney,receives 25% of the stock in Owl for legal services rendered in incorporating the business.What are the tax consequences of these transactions? How should this transaction have been handled?

Accepted Answer

Based on the facts provided,the transact

Question 14

When Pheasant Corporation was formed under § 351,Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock.Kristen's basis in the Pheasant stock is $26,000.Three years later,Pheasant Corporation goes bankrupt and its stock becomes worthless.Kristen,who is single,owned the stock as an investment.Kristen's loss is:

Accepted Answer

A) $26,000 capital. 
B) $22,500 ordinary and $3,500 capital. 
C) $3,500 ordinary and $22,500 capital. 
D) $26,000 ordinary. 
E) None of the above. 
A) $26,000 capital. 
B) $22,500 ordinary and $3,500 capital. 
C) $3,500 ordinary and $22,500 capital. 
D) $26,000 ordinary. 
E) None of the above.

Question 15

Four individuals form Chickadee Corporation under § 351.Two of these individuals,Jane and Walt,made the following contributions:
Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

Accepted Answer

A) Jane must recognize income of $40,000; Walt has no income. 
B) Neither Jane nor Walt recognize income. 
C) Walt must recognize income of $130,000; Jane has no income. 
D) Walt must recognize income of $100,000; Jane has no income. 
E) None of the above. 
A) Jane must recognize income of $40,000; Walt has no income. 
B) Neither Jane nor Walt recognize income. 
C) Walt must recognize income of $130,000; Jane has no income. 
D) Walt must recognize income of $100,000; Jane has no income. 
E) None of the above.

Question 16

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?

Accepted Answer

Generally when another party assumes a l

Question 17

Ashley,a 70% shareholder of Wren Corporation,transfers property with a basis of $250,000 and a fair market value of $900,000 to Wren Corporation for additional stock.Ashley owns 78% of Wren after the transfer.Two other shareholders in Wren transfer a nominal amount of property to Wren along with Ashley's transfer so that Ashley and the two shareholders own 90% of the Wren stock after the transfer.Does Ashley have taxable gain on the transfer?

Accepted Answer

Ashley would have a taxable gain of $650

Question 18

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351,the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

Accepted Answer

A) True 
 B)False

Question 19

Rhonda and Marta form Blue Corporation.Rhonda transfers land (basis of $55,000 and fair market value of $180,000) for 50 shares plus $20,000 cash.Marta transfers $160,000 cash for 50 shares in Blue Corporation.

Accepted Answer

A) Rhonda's basis in the Blue Corporation stock is $55,000. 
B) Blue Corporation's basis in the land is $55,000. 
C) Blue Corporation's basis in the land is $180,000. 
D) Rhonda recognizes a gain on the transfer of $125,000. 
E) None of the above. 
A) Rhonda's basis in the Blue Corporation stock is $55,000. 
B) Blue Corporation's basis in the land is $55,000. 
C) Blue Corporation's basis in the land is $180,000. 
D) Rhonda recognizes a gain on the transfer of $125,000. 
E) None of the above.

Question 20

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation.After the transfer,Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

Accepted Answer

A) Leah recognizes ordinary income of $70,000. 
B) The § 1245 depreciation recapture potential carries over to Crow Corporation. 
C) The § 1245 depreciation recapture potential disappears. 
D) Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000. 
E) None of the above. 
A) Leah recognizes ordinary income of $70,000. 
B) The § 1245 depreciation recapture potential carries over to Crow Corporation. 
C) The § 1245 depreciation recapture potential disappears. 
D) Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000. 
E) None of the above.

Exam 18: Corporations: Organization and Capital Structure

In structuring the capitalization of a corporation,the tax law is neutral for the investor as to debt versus equity financing.

Gabriella and Juanita form Luster Corporation.Gabriella transfers cash of $50,000 for 50 shares of stock,while Juanita transfers information concerning a proprietary process (basis of zero and fair market value of $50,000) for 50 shares of stock.

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000; land by Tony (basis of $25,000 and fair market value of $35,000).Dove Corporation issues 400 shares of stock,200 each to Sarah and Tony.Thus,each receives stock in Dove worth $50,000.

In a § 351 transfer,a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000.Only $7,000 of the boot will be taxed to the shareholder.

Albert transfers land (basis of $140,000 and fair market value of $320,000) to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000.Gold assumes Albert's mortgage on the land of $200,000.

When consideration is transferred to a corporation in return for stock,the definition of "property" is important because tax deferral treatment of § 351 is available only to taxpayers who transfer property.

If a transaction qualifies under § 351,any recognized gain is equal to the value of the boot received.

Kim,a real estate dealer,and others form Eagle Corporation under § 351.Kim contributes inventory (land held for resale) in return for Eagle stock.The holding period for the stock includes the holding period of the inventory.

In general,the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer.

Penny,Miesha,and Sabrina transfer property to Owl Corporation for 75% of its stock.Nancy,their attorney,receives 25% of the stock in Owl for legal services rendered in incorporating the business.What are the tax consequences of these transactions? How should this transaction have been handled?

Four individuals form Chickadee Corporation under § 351.Two of these individuals,Jane and Walt,made the following contributions: Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351,the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

Rhonda and Marta form Blue Corporation.Rhonda transfers land (basis of $55,000 and fair market value of $180,000) for 50 shares plus $20,000 cash.Marta transfers $160,000 cash for 50 shares in Blue Corporation.

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation.After the transfer,Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

An Introduction to Taxation and Understanding the Federal Tax Law

Working With the Tax Law

Computing the Tax

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: in General

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, cost Recovery, amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Investor Losses

Tax Credits and Payments

Property Transactions: Determination of Gain or Loss, basis Considerations, and Nontaxable Exchanges

Property Transactions, capital Gains and Losses, sec1231, and Recapture Provisions

Alternative Minimum Tax

Accounting Periods and Methods

Corporations: Introduction and Operating Rules

Corporations: Distributions Not in Complete Liquidation

Corporations: Distributions in Complete Liquidation and an Overview of Reorganization

Partnerships

S Corporations

Exempt Entities

Multistate Corporate Taxation

Taxation of International Transactions

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Income Taxation of Trusts and Estates

Filters