In a § 351 transfer, gain will be recognized to the extent of the lesser of realized gain or the boot received.

Question
Section 351 (which permits transfers to controlled corporations to be tax deferred) can be justified under the wherewithal to pay concept.

a. True
b. False

302. Que 2
Similar to like-kind exchanges, the receipt of “boot” under § 351 can cause loss to be recognized.

a. True
b. False

303. Que 3
Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000.

a. True
b. False

304. Que 4
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.

a. True
b. False

305. Que 5
In a § 351 transfer, the receipt of boot is not taxed if the shareholder has a realized loss.

a. True
b. False

306. Que 6
In a § 351 transfer, gain will be recognized to the extent of the lesser of realized gain or the boot received.

a. True
b. False

307. Que 7
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.

a. True
b. False

308. Que 8
The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.

a. True
b. False

309. Que 9
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.

a. True
b. False

310. Que10
A secret process and patentable invention both constitute “property” for purposes of § 351.

a. True
b. False

311. Que11
Since services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

a. True
b. False

312. Que12
The receipt of securities (i.e., long-term debt) in exchange for the transfer of appreciated property to a controlled corporation results in recognition of realized gain to the transferor.

a. True
b. False

313. Que13

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

a. True
b. False

314. Que14
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.

a. True
b. False

315. Que15
Jill transfers property worth $200,000 (basis of $190,000) to Blue Corporation. In return, she receives 80% of the stock in Blue Corporation (fair market value of $180,000) and a long-term note, executed by Blue and made payable to Jill (fair market value of $20,000). Jill recognizes gain of $20,000 on the transfer.

a. True
b. False

316. Que16
Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land (fair market value of $20,000) for 20 shares; and Ron, cattle (fair market value of $9,000) for 9 shares and services (fair market value of $21,000) for 21 shares. Section 351 will not apply in this situation because the control requirement has not been satisfied.

a. True
b. False

317. Que17
In order to retain the services of Bonnie, a key employee in Ralph’s sole proprietorship, Ralph contracts with Bonnie to make her a 25% owner. Ralph incorporates the business receiving in return 100% of the stock. Three days later, Ralph transfers 25% of the stock to Bonnie. Under these circumstances, § 351 will not apply to the incorporation of Ralph’s business.

a. True
b. False

318. Que18
One month after Sally incorporates her sole proprietorship, she gives 25% of the stock to her children. Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement.

a. True
b. False

319. Que19
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.

a. True
b. False

320. Que20
The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

a. True
b. False

321. Que21
The bona fide business requirement of § 357(b) is easily satisfied as long as the liability arose in the normal course of conducting the business that is incorporated.

a. True
b. False

322. Que22
When incorporating her sole proprietorship, Samantha transfers all of its assets and liabilities. Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure. Under these circumstances, the entire $30,000 will be treated as boot.

a. True
b. False

323. Que23
In determining whether § 357(c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

a. True
b. False

324. Que24

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 recognize gain to avoid having a negative basis in the stock.

a. True
b. False

325. Que25
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.

a. True
b. False

326. Que26
When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351, the transferor shareholder’s basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

a. True
b. False

327. Que27
In a § 351 transaction, Gerald transfers equipment worth $85,000 (basis of $120,000) in exchange for all of the Rust Corporation stock. Gerald’s stock basis is $120,000 and Rust’s basis in the equipment is $120,000.

a. True
b. False

328. Que28
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.

a. True
b. False

329. Que29
Isabella and Marta form Pine Corporation. Isabella transfers land (basis of $40,000 and fair market value of $180,000) for 50 shares plus $20,000 cash, while Marta transfers $160,000 cash for the other 50 shares in Pine Corporation. Pine Corporation has a basis of $40,000 in the land it receives from Isabella.

a. True
b. False

330. Que30
Carmen and Carlos form White Corporation. Carmen transfers cash of $100,000 for 100 shares in White. Carlos transfers property (basis of $20,000 and fair market value of $80,000) and agrees to serve as manager of White Corporation for one year; in return, Carlos receives 100 shares in White. The value of Carlos’s services is $20,000. White Corporation can deduct $20,000 as compensation expense for the value of the services Carlos will render.

a. True
b. False

331. Que31
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.

a. True
b. False

332. Que32
A corporation’s holding period for property received under § 351 includes the holding period of the transferor shareholder.

a. True
b. False

333. Que33
A shareholder’s holding period for stock received under § 351 includes the holding period of the property transferred to the corporation.

a. True
b. False

334. Que34
When depreciable property is transferred to a controlled corporation under § 351, any recapture potential disappears and does not carry over to the corporation.

a. True
b. False

335. Que35
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. True
b. False

336. Que36
Silver Corporation receives $1 million in cash from Madison County as an inducement to expand its operations. Within one year, Silver spends $1.5 million to enlarge its existing plant. Silver Corporation’s basis in the expansion is $500,000.

a. True
b. False

337. Que37
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.

a. True
b. False

338. Que38
Rosa, the sole shareholder of Robin Corporation, contributes land (basis of $40,000 and fair market value of $100,000) to the corporation but does not receive additional stock. Neither Rosa nor Robin Corporation will have to recognize gain as a result of this transfer.

a. True
b. False

339. Que39
If a corporation is thinly capitalized, all debt is reclassified as equity.

a. True
b. False

340. Que40
To help avoid the thin capitalization problem, it is advisable to make the repayment of the debt contingent upon the corporation’s earnings.

a. True
b. False

341. Que41
A shareholder lends money to his corporation in his capacity as an investor. If the loans become worthless, a business bad debt results.

a. True
b. False

342. Que42
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.

a. True
b. False

343. Que43
If a shareholder owns stock received as a gift from her mother, it cannot be § 1244 stock.

a. True
b. False


 

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