Question 1

In a § 351 transaction,if a transferor receives consideration other than stock,the transaction can be taxable.

Accepted Answer

A) True 
 B)False

Question 2

Because boot is generated under § 357(b) (i.e.,the liability is not supported by a bona fide business purpose),the transferor shareholder will always have to recognize gain.

Accepted Answer

A) True 
 B)False

Question 3

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

Accepted Answer

A) Wren Corporation is not permitted a deduction for the loans. 
B) The loans result in a nonbusiness bad debt deduction to Wren Corporation. 
C) The loans provide Wren Corporation with a business bad debt deduction. 
D) Wren claims a capital loss due to the uncollectible loans. 
E) None of the above. 
A) Wren Corporation is not permitted a deduction for the loans. 
B) The loans result in a nonbusiness bad debt deduction to Wren Corporation. 
C) The loans provide Wren Corporation with a business bad debt deduction. 
D) Wren claims a capital loss due to the uncollectible loans. 
E) None of the above.

Question 4

When depreciable property is transferred to a controlled corporation under § 351,any recapture potential disappears and does not carry over to the corporation.

Accepted Answer

A) True 
 B)False

Question 5

For transfers falling under § 351,what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?

Accepted Answer

In a § 351 transaction,the shareholder's

Question 6

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

Accepted Answer

A) True 
 B)False

Question 7

Ira,a calendar year taxpayer,purchases as an investment stock in Redbird Corporation on November 3,2016.On February 2,2017,Redbird Corporation is declared bankrupt,and Ira's stock becomes worthless.Presuming § 1244 (stock in a small business corporation) does not apply,Ira has a short-term capital loss for 2017.

Accepted Answer

A) True 
 B)False

Question 8

Perry organized Cardinal Corporation 10 years ago by contributing property worth $2 million (basis of $450,000) for 2,500 shares of stock in Cardinal,representing 100% of the stock in the corporation.Perry later gave each of his children,Brittany and Julie,750 shares of stock in Cardinal Corporation.In the current year,Perry transfers property worth $600,000 (basis of $150,000) to Cardinal for 1,000 shares in the corporation.What gain,if any,will Perry recognize on the transfer?

Accepted Answer

Perry recognizes a gain of $450,000 on t

Question 9

When forming a corporation,a transferor-shareholder may choose to receive some corporate debt along with stock.Identify some of the issues the transferor must consider when deciding whether debt should be a part of the transaction.

Accepted Answer

Significant tax diff

Question 10

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later,Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark City.Ann,the sole shareholder,contributes equipment (basis of $70,000 and fair market value of $200,000) to help Orange in its new operations.What are the tax consequences of these transfers to Orange Corporation?

Accepted Answer

Orange Corporation will not have income

Question 11

Dick,a cash basis taxpayer,incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation.
​
 
With respect to this transaction:

Accepted Answer

A) Orange Corporation's basis in the building is $120,000. 
B) Dick has no recognized gain. 
C) Dick has a recognized gain of $5,000. 
D) Dick has a recognized gain of $10,000. 
E) None of the above. 
A) Orange Corporation's basis in the building is $120,000. 
B) Dick has no recognized gain. 
C) Dick has a recognized gain of $5,000. 
D) Dick has a recognized gain of $10,000. 
E) None of the above.

Question 12

Because services are not considered property under § 351,a taxpayer must report as income the fair market value of stock received for such services.

Accepted Answer

A) True 
 B)False

Question 13

Stock in Merlin Corporation is held equally by Jane,Eve,and Fred.Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000.Jane,Eve,and Fred propose to loan Merlin $2,000,000 each,taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate.Merlin Corporation has current taxable income of $7,000,000.How are the payments on the notes treated for tax purposes?

Accepted Answer

Payments on the notes will probably be t

Question 14

George transfers cash of $150,000 to Finch Corporation,a newly formed corporation,for 100% of the stock in Finch worth $80,000 and debt in the amount of $70,000,payable in equal annual installments of $7,000 plus interest at the rate of 9% per annum.In the first year of operation,Finch has net taxable income of $40,000.If Finch pays George interest of $6,300 and $7,000 principal payment on the note:

Accepted Answer

A) George has dividend income of $13,300. 
B) Finch Corporation does not have a tax deduction with respect to the payment. 
C) George has dividend income of $7,000. 
D) Finch Corporation has an interest expense deduction of $6,300. 
E) None of the above. 
A) George has dividend income of $13,300. 
B) Finch Corporation does not have a tax deduction with respect to the payment. 
C) George has dividend income of $7,000. 
D) Finch Corporation has an interest expense deduction of $6,300. 
E) None of the above.

Question 15

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation,Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

Accepted Answer

A) Adam has taxable income of $50,000. 
B) Camel Corporation has a tax deduction of $50,000. 
C) Adam has no taxable income from the distribution. 
D) Camel Corporation reduces its basis in the land to $150,000. 
E) None of the above. 
A) Adam has taxable income of $50,000. 
B) Camel Corporation has a tax deduction of $50,000. 
C) Adam has no taxable income from the distribution. 
D) Camel Corporation reduces its basis in the land to $150,000. 
E) None of the above.

Question 16

A taxpayer transfers assets and liabilities to a corporation in return for its stock.If the liabilities exceed the basis of the assets transferred,the taxpayer will have a negative basis in the stock.

Accepted Answer

A) True 
 B)False

Question 17

Hazel transferred the following assets to Starling Corporation.
​
 
In exchange,Hazel received 50% of Starling Corporation's only class of stock outstanding.The stock has no established value.However,all parties believe that the value of the stock Hazel received is the equivalent of the value of the assets she transferred.The only other shareholder,Rick,formed Starling Corporation five years ago.

Accepted Answer

A) Hazel has no gain or loss on the transfer. 
B) Starling Corporation has a basis of $48,000 in the machinery and $108,000 in the land. 
C) Starling Corporation has a basis of $36,000 in the machinery and $144,000 in the land. 
D) Hazel has a basis of $276,000 in the stock of Starling Corporation. 
E) None of the above. 
A) Hazel has no gain or loss on the transfer. 
B) Starling Corporation has a basis of $48,000 in the machinery and $108,000 in the land. 
C) Starling Corporation has a basis of $36,000 in the machinery and $144,000 in the land. 
D) Hazel has a basis of $276,000 in the stock of Starling Corporation. 
E) None of the above.

Question 18

Allen transfers marketable securities with an adjusted basis of $120,000,fair market value of $300,000,for 85% of the stock of Heron Corporation.In addition,he receives cash of $40,000.Allen recognizes a capital gain of $40,000 on the transfer.

Accepted Answer

A) True 
 B)False

Question 19

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

Accepted Answer

A) True 
 B)False

Question 20

In order to retain the services of Eve,a key employee in Ted's sole proprietorship,Ted contracts with Eve to make her a 30% owner.Ted incorporates the business receiving in return 100% of the stock.Three days later,Ted transfers 30% of the stock to Eve.Under these circumstances,§ 351 will not apply to the incorporation of Ted's business.

Accepted Answer

A) True 
 B)False

Exam 18: Corporations: Organization and Capital Structure

In a § 351 transaction,if a transferor receives consideration other than stock,the transaction can be taxable.

Because boot is generated under § 357(b) (i.e.,the liability is not supported by a bona fide business purpose),the transferor shareholder will always have to recognize gain.

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

When depreciable property is transferred to a controlled corporation under § 351,any recapture potential disappears and does not carry over to the corporation.

For transfers falling under § 351,what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

When forming a corporation,a transferor-shareholder may choose to receive some corporate debt along with stock.Identify some of the issues the transferor must consider when deciding whether debt should be a part of the transaction.

Dick,a cash basis taxpayer,incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation. ​ With respect to this transaction:

Because services are not considered property under § 351,a taxpayer must report as income the fair market value of stock received for such services.

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation,Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

A taxpayer transfers assets and liabilities to a corporation in return for its stock.If the liabilities exceed the basis of the assets transferred,the taxpayer will have a negative basis in the stock.

Allen transfers marketable securities with an adjusted basis of $120,000,fair market value of $300,000,for 85% of the stock of Heron Corporation.In addition,he receives cash of $40,000.Allen recognizes a capital gain of $40,000 on the transfer.

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

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

Dick,a cash basis taxpayer,incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation. With respect to this transaction: