Question 1

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 2

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 3

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 and Art's basis in the Condor stock is $130,000.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.

Question 4

Gabriella and Juanita form Luster Corporation.Gabriella transfers cash of $50,000 for 50 shares of stock,while Juanita transfers a secret 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.

Question 5

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 6

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

Accepted Answer

A) Robin Corporation's basis in the building is $100,000. 
B) Ronald has no recognized gain. 
C) Ronald has a recognized gain of $20,000. 
D) Ronald has a recognized gain of $10,000. 
E) None of the above.

Question 7

The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.

Accepted Answer

A) True 
 B)False

Question 8

Earl and Mary form Crow Corporation.Earl transfers property,basis of $200,000 and value of $1,600,000,for 50 shares in Crow Corporation.Mary transfers property,basis of $80,000 and value of $1,480,000,and agrees to serve as manager of Crow for one year;in return Mary receives 50 shares of Crow.The value of Mary's services is $120,000.With respect to the transfers:

Accepted Answer

A) Mary will not recognize gain or income. 
B) Earl will recognize a gain of $1,400,000. 
C) Crow Corporation has a basis of $1,480,000 in the property it received from Mary. 
D) Crow will have a business deduction of $120,000 for the value of the services Mary will render. 
E) None of the above.

Question 9

When a taxpayer incorporates her business,she transfers several liabilities to the corporation.If one of the liabilities is personal in nature,only that liability is treated as boot.

Accepted Answer

A) True 
 B)False

Question 10

Sarah and Tony (mother and son)form Dove Corporation with the following investments: cash by Sarah of $55,000;land by Tony (basis of $35,000 and fair market value of $45,000).Dove Corporation issues 200 shares of stock,100 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 110 shares instead of only 100. 
B) As a result of the transfer,Tony recognizes a gain of $10,000. 
C) Tony's basis in the stock of Dove Corporation is $50,000. 
D) Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred. 
E) None of the above.

Question 11

Juan exchanges property,basis of $200,000 and fair market value of $2.5 million,for 65% of the stock of Green Corporation.The other 35% is owned by Gloria who acquired it several years ago.What are the tax consequences to the parties involved?

Accepted Answer

The answer of Juan exchanges property,basis of $200,000 and fair...

Question 12

Four years ago,Don,a single taxpayer,acquired stock in a corporation that qualified as a small business corporation under § 1244,at a cost of $60,000.Don wants to give his son,Ron,$20,000 to help finance Ron's college education.The stock is currently worth $20,000.Don is considering selling the stock in the current year for $20,000 and giving the cash to Ron.As an alternative,Don could give the stock to Ron and let Ron sell it for $20,000.Which alternative should Don choose?

Accepted Answer

The answer of Four years ago,Don,a single taxpayer,acquired stock in...

Question 13

A shareholder contributes land to his wholly owned corporation but receives no stock in return.The corporation has a zero basis in the land.

Accepted Answer

A) True 
 B)False

Question 14

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 be handled?

Accepted Answer

The answer of Penny,Miesha,and Sabrina transfer property to Owl Corporation...

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 not apply to the incorporation of Ted's business.

Accepted Answer

A) True 
 B)False

Question 16

In determining whether § 357(c)applies,assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 19

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

Question 20

Tan Corporation desires to set up a manufacturing facility in the western part of the United States.After considerable negotiations with Butte,Montana,Tan accepts the following offer: land (fair market value of $4.5 million)and cash of $1.5 million.

Accepted Answer

The answer of Tan Corporation desires to set up a...

Exam 18: Corporations: Organization and Capital Structure

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.

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:

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

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.

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

The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.

When a taxpayer incorporates her business,she transfers several liabilities to the corporation.If one of the liabilities is personal in nature,only that liability is treated as boot.

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $55,000;land by Tony (basis of $35,000 and fair market value of $45,000) .Dove Corporation issues 200 shares of stock,100 each to Sarah and Tony.Thus,each receives stock in Dove worth $50,000.

Juan exchanges property,basis of $200,000 and fair market value of $2.5 million,for 65% of the stock of Green Corporation.The other 35% is owned by Gloria who acquired it several years ago.What are the tax consequences to the parties involved?

A shareholder contributes land to his wholly owned corporation but receives no stock in return.The corporation has a zero basis in the land.

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 be handled?

In determining whether § 357(c)applies,assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

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.

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

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

Tan Corporation desires to set up a manufacturing facility in the western part of the United States.After considerable negotiations with Butte,Montana,Tan accepts the following offer: land (fair market value of $4.5 million)and cash of $1.5 million.