Question 1

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 2

Lynn transfers property (basis of $225,000 and fair market value of $300,000) to Condor Corporation in exchange for § 1244 stock. The transfer qualifies as a nontaxable exchange under § 351. In the current year, Lynn sells the Condor stock for $100,000. Assume Lynn files a joint return with her husband, Ricky. With respect to the sale, Lynn has:

Accepted Answer

A)  An ordinary loss of $125,000. 
B)  An ordinary loss of $100,000 and a capital loss of $25,000. 
C)  A capital loss of $125,000. 
D)  An ordinary loss of $100,000 and a capital loss of $100,000. 
E)  None of the above. 
A)  An ordinary loss of $125,000. 
B)  An ordinary loss of $100,000 and a capital loss of $25,000. 
C)  A capital loss of $125,000. 
D)  An ordinary loss of $100,000 and a capital loss of $100,000. 
E)  None of the above.

Question 3

A city contributes $500,000 to a corporation as an inducement to locate in the city. Within the next 12 months, the corporation uses the money to purchase property worth $500,000. The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

Accepted Answer

A) True 
 B)False

Question 4

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 5

Nick exchanges property (basis of $100,000? fair market value of $3 million), for 65% of the stock of Yellow Corporation. The other 35% of the stock is owned by Gloria who acquired it several years ago. What are the tax consequences to Nick?

Accepted Answer

Nick has a taxable gain of $2,900,000. S

Question 6

Karen formed Grebe Corporation with an investment of $100,000 cash, for which she received $10,000 in stock and $90,000 in 7% interest-bearing bonds maturing in ten years. A few years later, Karen loaned Grebe an additional $60,000 on open account. Grebe becomes insolvent in the current year and is adjudged bankrupt. Karen was the president of Grebe Corporation and was paid an annual salary of $50,000 for the past three years. Karen has no other employment. How will Karen treat her losses for tax purposes?

Accepted Answer

If the stock is § 1244 stock, Karen has

Question 7

Basis of appreciated property transferred minus boot received (including liabilities transferred) plus gain recognized equals basis of stock received in a § 351 transfer.

Accepted Answer

A) True 
 B)False

Question 8

What is the rationale underlying the tax deferral treatment available under § 351?

Accepted Answer

Realized gain or loss is not recognized

Question 9

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 10

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares? Brad, land worth $20,000 (basis of $11,000) for 20 shares? and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

Accepted Answer

A)  These transfers are fully taxable and not subject to § 351. 
B)  Ron's basis in his stock is $27,000. 
C)  Ron's basis in his stock is $6,000. 
D)  Brad's basis in his stock is $20,000. 
E)  None of the above. 
A)  These transfers are fully taxable and not subject to § 351. 
B)  Ron's basis in his stock is $27,000. 
C)  Ron's basis in his stock is $6,000. 
D)  Brad's basis in his stock is $20,000. 
E)  None of the above.

Question 11

If a shareholder owns stock received as a gift from her mother, it cannot be § 1244 stock.

Accepted Answer

A) True 
 B)False

Question 12

Ann transferred land worth $200,000, with a tax basis of $40,000, to Brown Corporation, an existing entity, for 100 shares of its stock. Brown Corporation has two other shareholders, Bill and Bob, each of whom holds 100 shares. With respect to the transfer:

Accepted Answer

A)  Ann has no recognized gain. 
B)  Brown Corporation has a basis of $160,000 in the land. 
C)  Ann has a basis of $200,000 in her 100 shares in Brown Corporation. 
D)  Ann has a basis of $40,000 in her 100 shares in Brown Corporation. 
E)  None of the above. 
A)  Ann has no recognized gain. 
B)  Brown Corporation has a basis of $160,000 in the land. 
C)  Ann has a basis of $200,000 in her 100 shares in Brown Corporation. 
D)  Ann has a basis of $40,000 in her 100 shares in Brown Corporation. 
E)  None of the above.

Question 13

A shareholder's holding period for stock received under § 351 can include the holding period of the property transferred to the corporation.

Accepted Answer

A) True 
 B)False

Question 14

Hunter and Warren form Tan Corporation. Hunter transfers equipment (basis of $210,000 and fair market value of $180,000) while Warren transfers land (basis of $15,000 and fair market value of $150,000) and $30,000 of cash. Each receives 50% of Tan's stock. As a result of these transfers:

Accepted Answer

A)  Hunter has a recognized loss of $30,000, and Warren has a recognized gain of $135,000. 
B)  Neither Hunter nor Warren has any recognized gain or loss. 
C)  Hunter has no recognized loss, but Warren has a recognized gain of $30,000. 
D)  Tan Corporation will have a basis in the land of $45,000. 
E)  None of the above. 
A)  Hunter has a recognized loss of $30,000, and Warren has a recognized gain of $135,000. 
B)  Neither Hunter nor Warren has any recognized gain or loss. 
C)  Hunter has no recognized loss, but Warren has a recognized gain of $30,000. 
D)  Tan Corporation will have a basis in the land of $45,000. 
E)  None of the above.

Question 15

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 apply to the incorporation of Ted's business.

Accepted Answer

A) True 
 B)False

Question 16

Art, an unmarried individual, transfers property (basis of $130,000 and fair market value of $120,000) to Condor Corporation in exchange for §1244 stock. The transfer qualifies as a nontaxable exchange under § 351. Because the property is loss property, Condor takes a basis in the property of $120,000. Five years later, Art sells the Condor stock for $50,000. With respect to the sale, Art has:

Accepted Answer

A)  An ordinary loss of $80,000. 
B)  An ordinary loss of $70,000 and a capital loss of $10,000. 
C)  A capital loss of $80,000. 
D)  A capital loss of $30,000 and an ordinary loss of $50,000. 
E)  None of the above. 
A)  An ordinary loss of $80,000. 
B)  An ordinary loss of $70,000 and a capital loss of $10,000. 
C)  A capital loss of $80,000. 
D)  A capital loss of $30,000 and an ordinary loss of $50,000. 
E)  None of the above.

Question 17

Seoyun and Nicole form Indigo Corporation with the following transfers: inventory from Seoyun (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo. The corporation's stock is distributed equally to Seoyun and Nicole. As a result of these transfers:

Accepted Answer

A)  Indigo can deduct $25,000 as a business expense. 
B)  Nicole has a recognized gain of $55,000 on the transfer of the real estate. 
C)  Indigo has a basis of $360,000 in the inventory. 
D)  Indigo has a basis of $375,000 in the real estate. 
E)  None of the above. 
A)  Indigo can deduct $25,000 as a business expense. 
B)  Nicole has a recognized gain of $55,000 on the transfer of the real estate. 
C)  Indigo has a basis of $360,000 in the inventory. 
D)  Indigo has a basis of $375,000 in the real estate. 
E)  None of the above.

Question 18

To ease a liquidity problem, all of the shareholders of Osprey Corporation contribute additional cash to its capital.
Osprey has no tax consequences from the contribution.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation.

Accepted Answer

A) True 
 B)False

Exam 18: Corporations: Organization and Capital Structure

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

A city contributes $500,000 to a corporation as an inducement to locate in the city. Within the next 12 months, the corporation uses the money to purchase property worth $500,000. The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

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?

Nick exchanges property (basis of $100,000? fair market value of $3 million), for 65% of the stock of Yellow Corporation. The other 35% of the stock is owned by Gloria who acquired it several years ago. What are the tax consequences to Nick?

Basis of appreciated property transferred minus boot received (including liabilities transferred) plus gain recognized equals basis of stock received in a § 351 transfer.

What is the rationale underlying the tax deferral treatment available under § 351?

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.

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares? Brad, land worth $20,000 (basis of $11,000) for 20 shares? and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

If a shareholder owns stock received as a gift from her mother, it cannot be § 1244 stock.

Ann transferred land worth $200,000, with a tax basis of $40,000, to Brown Corporation, an existing entity, for 100 shares of its stock. Brown Corporation has two other shareholders, Bill and Bob, each of whom holds 100 shares. With respect to the transfer:

A shareholder's holding period for stock received under § 351 can include the holding period of the property transferred to the corporation.

Hunter and Warren form Tan Corporation. Hunter transfers equipment (basis of $210,000 and fair market value of $180,000) while Warren transfers land (basis of $15,000 and fair market value of $150,000) and $30,000 of cash. Each receives 50% of Tan's stock. As a result of these transfers:

To ease a liquidity problem, all of the shareholders of Osprey Corporation contribute additional cash to its capital. Osprey has no tax consequences from the contribution.

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

A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation.

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, Section 1231, and Recapture Provisions

Taxing Business Income

Accounting Periods and Methods

Corporations: Introduction and Operating Rules

Corporations: Distributions Not in Complete Liquidation

Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

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