Question 1

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 2

Rick transferred the following assets and liabilities to Warbler Corporation.  In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000).

Accepted Answer

A)  Rick has a recognized gain of $60,000. 
B)  Rick has a recognized gain of $75,000. 
C)  Rick's basis in the stock of Warbler Corporation is $270,000. 
D)  Warbler Corporation has the same basis in the assets received as Rick does in the stock. 
E)  None of the above.

Question 3

The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

Accepted Answer

A) True 
 B)False

Question 4

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

The answer of Lark City donates land worth $300,000 and...

Question 5

Joyce, a single taxpayer, transfers property (basis of $120,000 and fair market value of $60,000) to Wren Corporation in exchange for shares of § 1244 stock. As the transfer qualifies under § 351, Joyce takes a $120,000 basis in the Wren stock. In the current year, Joyce sells the Wren Corporation stock for $40,000. What are the consequences of the sale to Joyce?

Accepted Answer

The answer of Joyce, a single taxpayer, transfers property (basis...

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.

Question 7

Amy owns 20% of the stock of Wren Corporation, which she acquired several years ago at a cost of $10,000. Amy is Vice-President of Wren and earns a salary of $80,000 annually. Last year, Wren Corporation was experiencing financial problems, and Amy loaned the corporation $25,000. In the current year, Wren becomes bankrupt, and both her stock investment and the loan become worthless. Amy has a nonbusiness bad debt deduction this year of $25,000.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

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.

Question 11

Joe and Kay form Gull Corporation. Joe transfers cash of $250,000 for 200 shares in Gull Corporation. Kay transfers property with a basis of $50,000 and fair market value of $240,000. She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation. The value of Kay's services is $10,000. With respect to the transfer:

Accepted Answer

A)  Gull Corporation has a basis of $240,000 in the property transferred by Kay. 
B)  Neither Joe nor Kay recognizes gain or income on the exchanges. 
C)  Gull Corporation has a compensation deduction of $10,000. 
D)  Gull capitalizes $10,000 as organizational costs. 
E)  None of the above.

Question 12

In order to encourage the development of an industrial park, a county donates land to Ecru Corporation. The donation does not result in gross income to Ecru.

Accepted Answer

A) True 
 B)False

Question 13

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.

Question 14

The control requirement under § 351 requires that the person or persons transferring property to the corporation, immediately after the transfer, own stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

Accepted Answer

A) True 
 B)False

Question 15

Carl transfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000. The land, which has a basis to Carl of $70,000, is worth $160,000.

Accepted Answer

A)  Carl will have a recognized gain on the transfer of $90,000. 
B)  Carl will have a recognized gain on the transfer of $30,000. 
C)  Cardinal Corporation will have a basis in the land transferred by Carl of $70,000. 
D)  Cardinal Corporation will have a basis in the land transferred by Carl of $160,000. 
E)  None of the above.

Question 16

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

Accepted Answer

A) True 
 B)False

Question 17

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

The answer of Perry organized Cardinal Corporation 10 years ago...

Question 18

Similar to like­kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

Accepted Answer

A) True 
 B)False

Question 19

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.

Question 20

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

Accepted Answer

The answer of What is the rationale underlying the tax...

Exam 4: Corporations: Organization and Capital Structure

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.

Rick transferred the following assets and liabilities to Warbler Corporation. In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000) .

The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

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.

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.

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.

In order to encourage the development of an industrial park, a county donates land to Ecru Corporation. The donation does not result in gross income to Ecru.

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:

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

Similar to likekind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

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

Exam 4: Corporations: Organization and Capital Structure

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.

Rick transferred the following assets and liabilities to Warbler Corporation. In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000) .

The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

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.

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.

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.

In order to encourage the development of an industrial park, a county donates land to Ecru Corporation. The donation does not result in gross income to Ecru.

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:

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

Similar to like­kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

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

Similar to likekind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.