Question 1

All accounts payable of a cash basis taxpayer are included as liabilities under § 357(c)in determining whether liabilities exceed basis.

Accepted Answer

A) True 
 B)False  False

Question 2

To help avoid the thin capitalization problem,it is advisable to make the repayment of the debt contingent upon the corporation's earnings.

Accepted Answer

A) True 
 B)False  False

Question 3

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 differences exist between debt and equity in the capital structure.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Carl and Ben form Eagle Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Eagle.Ben transfers a secret process 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,but Ben's basis in his stock will be zero.

Accepted Answer

A) True 
 B)False

Question 6

In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville,Tennessee,the city donates land (fair market value of $400,000)and cash of $100,000 to the corporation.Several months after the donation,Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville)on the construction of a new plant located on the donated land.

Accepted Answer

A)  Yellow recognizes income of $100,000 as to the donation.
B)  Yellow has a zero basis in the land and a basis of $450,000 in the plant.
C)  Yellow recognizes income of $500,000 as to the donation.
D)  Yellow has a zero basis in the land and a basis of $350,000 in the plant.
E)  None of the above.

Question 7

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 8

In 2005,Donna transferred assets (basis of $300,000 and fair market value of $250,000)to Egret Corporation in return for 200 shares of § 1244 stock.Due to § 351,the transfer was nontaxable;therefore,Donna's basis in the Egret stock is $300,000.In 2006,Donna sells 100 of these shares to Walter (a family friend)for $100,000.In 2012,Egret Corporation files for bankruptcy,and its stock becomes worthless.

Accepted Answer

The answer of In 2005,Donna transferred assets (basis of $300,000...

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Dawn,a sole proprietor,was engaged in a service business and reported her income on a cash basis.Later,she incorporates her business and transfers the assets of the business to the corporation in return for all the stock in the corporation plus the corporation's assumption of the liabilities of her proprietorship.All the receivables and the unpaid trade payables are transferred to the newly formed corporation.The assets of the proprietorship had a basis of $105,000 and fair market value of $300,000.The trade accounts payable totaled $25,000.There was a note payable to the bank in the amount of $95,000 that the corporation assumes.The note was issued for the purchase of computers and other business equipment.

Accepted Answer

A)  Dawn has a gain on the transfer of $15,000.
B)  The basis of the assets to the corporation is $300,000.
C)  Dawn has a basis of $10,000 in the stock she receives.
D)  Dawn has a zero basis in the stock she receives.
E)  None of the above.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

The answer of Nick exchanges property (basis of $100,000;fair market...

Question 13

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 14

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.

Question 15

Lucy and Marta form Blue Corporation.Lucy transfers land (basis of $40,000 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)  Lucy's basis in the Blue Corporation stock is $40,000.
B)  Blue Corporation's basis in the land is $40,000.
C)  Blue Corporation's basis in the land is $180,000.
D)  Lucy recognizes a gain on the transfer of $140,000.
E)  None of the above.

Question 16

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.

Question 17

If both §§ 357(b)and (c)apply to the same transfer (i.e. ,the liability is not supported by a bona fide business purpose and also exceeds the basis of the properties transferred),§ 357(c)predominates.

Accepted Answer

A) True 
 B)False

Question 18

Five years ago,Joe,a single taxpayer,acquired stock in a corporation that qualified as a small business corporation under § 1244,at a cost of $55,000.Joe wants to give his son,Jake,$15,000 to help finance Jake's college education.The stock is currently worth $15,000.Joe is considering selling the stock in the current year for $15,000 and giving the cash to Jake.As an alternative,Joe could give the stock to Jake and let Jake sell it for $15,000.Which alternative should Joe choose?

Accepted Answer

The answer of Five years ago,Joe,a single taxpayer,acquired stock in...

Question 19

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 20

A secret process and patentable invention both constitute "property" under § 351.

Accepted Answer

A) True 
 B)False

Exam 4: Corporations: Organization and Capital Structure

All accounts payable of a cash basis taxpayer are included as liabilities under § 357(c)in determining whether liabilities exceed basis.

To help avoid the thin capitalization problem,it is advisable to make the repayment of the debt contingent upon the corporation's earnings.

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.

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

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

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

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?

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

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.

Lucy and Marta form Blue Corporation.Lucy transfers land (basis of $40,000 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.

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

If both §§ 357(b)and (c)apply to the same transfer (i.e. ,the liability is not supported by a bona fide business purpose and also exceeds the basis of the properties transferred),§ 357(c)predominates.

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

A secret process and patentable invention both constitute "property" under § 351.