Deck 2: Corporate Formations and Capital Structure

Question 1

Bread Corporation is a C corporation with earnings of $100,000. It paid $20,000 in dividends to its sole shareholder, Gerald. Gerald also owns 100% of Butter Corporation, an S corporation. Butter had net taxable income of $80,000 and made a $15,000 distribution to Gerald. What income will Gerald report from Bread and Butter's activities?

A) $35,000
B) $100,000
C) $95,000
D) $180,000

Answer 1

B

Question 2

Identify which of the following statements is false.

A) A sole proprietor is considered to be an employee of the business.
B) A sole proprietorship is a separate taxable entity.
C) A solely owned corporation is a sole proprietorship.
D) All of the above are false.

Answer 2

D

Question 3

Which of the following statements is correct?

A) S shareholders are only taxed on distributions.
B) An owner of a C corporation is taxed on his or her proportionate share of earnings.
C) S shareholders are taxed on their proportionate share of earnings whether or not distributed.
D) S shareholders are taxed on their proportionate share of earnings that are distributed.

Answer 3

C

Question 4

What are the tax consequences to Whitney who owns 50% of Museum Corporation, a qualifying S corporation that is a calendar- year entity, if Museum Corporation reports $60,000 of taxable income? How would your answer change if Museum Corporation reported a $40,000 loss?

Question 5

A sole proprietor is required to use the same reporting period for both business and individual tax information.

Question 6

Identify which of the following statements is true.

A) If a C corporation does not distribute its income to its shareholders annually, double taxation cannot occur.
B) C corporation operating losses are deductible by the individual shareholders.
C) Capital losses incurred by a C corporation can be used to offset the corporation's ordinary income.
D) All of the above are false.

Question 7

The tax disadvantages of the C corporation form of doing business include "double taxation." What is meant by the term "double taxation" as used in this context?

Question 8

S corporations must allocate income to shareholders based on their proportionate stock ownership.

Question 9

Identify which of the following statements is true.

A) Regular corporation and S corporation are synonymous terms.
B) A partner is generally considered to be an employee of the partnership.
C) Regular corporation and C corporation are synonymous terms.
D) All of the above are false.

Question 10

Jane and Joe plan to go into business together. They plan to incorporate the business. What tax issues should the consider when deciding whether or not to elect S corporation status?
• Are their individual marginal tax rates lower or higher than a C corporation's marginal tax rates?
• Do they anticipate profits or losses in the first few years of business?
• Will the corporation generate any capital gains or losses?
• Do they plan to withdraw money from the corporation?
• Will they want or need fringe benefits?
• Do they plan to use a calendar year end or a fiscal year end?

Question 11

S corporations are flow- through entities in which S income is allocated to shareholders.

Question 12

Which of the following statements is incorrect?

A) In a limited partnership, all partners participate in managerial decision making.
B) Limited partners' liability for partnership debt is limited to their amount of investment.
C) In a general partnership, all partners have unlimited liability for partnership debts.
D) All of the above are correct.

Question 13

Which of the following statements is incorrect?

A) S corporation losses can offset shareholder income from other sources.
B) S corporation income is taxed to shareholders when earned.
C) S corporations must allocate income and expenses to their shareholders based on their proportionate ownership interest.
D) The number of S corporation shareholders is unlimited.

Question 14

Demarcus is a 50% partner in the DJ partnership. DJ has taxable income for the year of $200,000. Demarcus received a $75,000 distribution from the partnership. What amount of income related to DJ must Demarcus recognize?

A) $100,000
B) $200,000
C) $75,000
D) $37,500

Question 15

Which of the following is an advantage of a sole proprietorship over other business forms?

A) low tax rates on dividends
B) tax- exempt treatment of fringe benefits
C) the deduction for compensation paid to the owner
D) ease of formation

Question 16

In January of the current year, Rae purchases 100% of Sun Corporation stock for $30,000. Sun Corporation reports taxable income of $25,000 in the current year, on which it pays tax of $3,750. None of the remaining
$21,250 is distributed to Rae. However, on January 1 of the next year, Rae sells her stock to Lee for $51,250. What are the tax consequences to Rae of the sale?

Question 17

Which of the following statements is true?

A) C corporation shareholders are taxed based on their proportionate share of income.
B) Shareholders in a C corporation can use C corporation losses to offset shareholder income from other sources.
C) Distributions of C corporation income are not taxable.
D) C corporation losses remain in the C corporation and can offset capital gain income from other years.

Question 18

Which of the following statements about a partnership is true?

A) A partnership is a taxpaying entity.
B) Partners are taxed on distributions from a partnership.
C) Partners are considered employees of the partnership.
D) Partners are taxed on their allocable share of income whether it is distributed or not.

Question 19

Business assets of a sole proprietorship are owned by

A) a member.
B) an individual.
C) a stockholder.
D) a partner.

Question 20

Nathan is single and owns a 54% interest in the new NT Partnership, a calendar- year entity. The NT Partnership reports $100,000 of profits for its first year. Assuming Nathan is taxed at a 35% marginal tax rate on the additional income, how much tax does Nathan owe if the NT Partnership does not distribute any of its profits to him?

Question 21

The transferor's basis for any noncash boot property received in a Sec. 351 transaction is the boot's FMV reduced by any unrecognized gain.

Question 22

On January 20 of the current year, a group of ten individuals organize an LLC to conduct an ink- making business in Florida. This year, the LLC is an eligible entity under the check- the- box regulations. How will the LLC be taxed?

Question 23

If a corporation's total adjusted bases for all properties transferred exceed the total FMV of the properties, the corporation's bases in the property is limited to FMV if no election is made.

Question 24

Three members form an LLC in the current year. Which of the following statements is incorrect?

A) The LLC's default classification under the check- the- box rules is as a partnership.
B) The LLC can elect to be taxed as a C corporation with no special tax consequences.
C) If the LLC elects to use its default classification, it can elect to change its status to being taxed as a C corporation beginning with the third tax year after the initial classification.
D) The LLC can elect to have its default classification ignored.

Question 25

Identify which of the following statements is true.

A) If a taxpayer transfers property and services as part of a transaction meeting the Sec. 351 requirements, all of the stock received is counted in determining whether the property transferors have acquired control.
B) A transferor's gain or loss that goes unrecognized when Sec. 351 applies is permanently exempt from taxation.
C) If a taxpayer transfers property and services as part of a transaction meeting the Sec. 351 requirements, the nonrecognition of gain or loss will apply to the services.
D) All of the above are false.

Question 26

For Sec. 351 purposes, the term "property" does not include

A) cash.
B) services rendered.
C) accounts receivable.
D) inventory.

Question 27

Identify which of the following statements is true.

A) Only transfers to newly created corporations qualify for Sec. 351 treatment.
B) If a shareholder receives stock with an FMV greater than the FMV of the property exchanged in a Sec. 351 transaction, the excess FMV may be considered a gift from one shareholder to another shareholder.
C) To qualify for Sec. 351 treatment, control is defined as more than 50% ownership of the voting stock, and more than 50% of all other classes of stock.
D) All of the above are false.

Question 28

There are no tax consequences of a partnership converting to a C corporation.

Question 29

The assignment of income doctrine does not apply if the transferor in a Sec. 351 exchange in which no gain is otherwise recognized transfers substantially all the assets and liabilities of the transferor's trade or business to the controlled corporation.

Question 30

Identify which of the following statements is true.

A) The repeal of Sec. 351 would result in more existing businesses being incorporated.
B) The exchange of stock for services rendered is not a taxable transaction.
C) Section 351 was enacted to allow taxpayers to incorporate without incurring adverse tax consequences.
D) All of the above are false.

Question 31

Barry, Dan, and Edith together form a new corporation; Barry and Dan each contribute property in exchange for stock. Within two weeks after the formation, the corporation issues additional stock to Edith in exchange for property. Barry and Dan each hold 10,000 shares and Edith will receive 9,000 shares. Which transactions will qualify for nonrecognition?

A) Only the first transaction will qualify for nonrecognition.
B) Only the second transaction will qualify for nonrecognition.
C) Because of the step transaction doctrine, neither transaction will qualify.
D) Both transactions will qualify under Sec. 351 if they are part of the same plan of incorporation.

Question 32

Identify which of the following statements is true.

A) Under the check- the- box regulations, an LLC that has one member (owner) may be disregarded as an entity separate from its owner.
B) A new LLC that is owned by four members elects to be taxed under its default classification (as a partnership) in its first year of operations. The entity is prohibited from changing its tax classification at any time in the future.
C) An unincorporated business may not be taxed as a corporation.
D) All of the above are false.

Question 33

Rose and Wayne form a new corporation. Rose contributes cash for 85% of the stock and Wayne contributes services for 15% of the stock. The tax effect is

A) Wayne must report the FMV of the stock received as capital gain.
B) Rose and Wayne are not required to recognize their realized gains.
C) Wayne must report the FMV of the stock received as ordinary income.
D) Rose and Wayne must recognize their realized gains, if any.

Question 34

Upon formation of a corporation, its assets have the same bases for book and tax purposes.

Question 35

Identify which of the following statements is false.

A) Once an election is made to change its classification, an entity cannot change again for 60 months.
B) A business need not be incorporated under state or federal law to be taxed as a corporation.
C) The check- the- box regulations permit an LLC to be taxed as a C corporation.
D) Under the check- the- box regulations, an LLC that has only two members (owners) must be taxed as a partnership.

Question 36

Identify which of the following statements is true.

A) Section 351 applies to property transfers in exchange for stock.
B) Section 351 applies exclusively to the formation of a new corporation.
C) Section 351 only applies to individual transferors.
D) All of the above are false.

Question 37

Section 351 applies to an exchange if the contributing shareholders own more than 50% of a corporation's stock after the transfer.

Question 38

The check- the- box regulations permit an LLC to be taxed as a C corporation.

Question 39

A corporation must recognize a loss when transferring noncash boot property that has declined in value and its stock to a transferor as part of a Sec. 351 exchange.

Question 40

Jermaine owns all 200 shares of Peach Corporation stock valued at $50,000. Kenya, a new shareholder, receives 200 newly issued shares from Peach Corporation in exchange for inventory with an adjusted basis of $40,000 and an FMV of $50,000. Which of the following statements is correct?

A) The transaction results in $10,000 of ordinary income for Kenya.
B) No gain will be recognized by Kenya.
C) Kenya may defer the recognition of any tax until the stock is sold.
D) The transaction results in $10,000 of capital gain for Kenya.

Question 41

Cherie transfers two assets to a newly- created corporation. The first asset has an adjusted basis of $40,000 and an FMV of $50,000. The second asset has an adjusted basis of $35,000 and an FMV of
$25,000. Cherie receives stock with an FMV of $66,000 and $9,000 cash. Cherie must recognize a gain of

A) $6,000.
B) $10,000.
C) $5,000.
D) $4,000.

Question 42

Henry transfers property with an adjusted basis of $90,000 and an FMV of $100,000 to a newly- formed corporation in a Sec. 351 exchange. Henry receives stock with an FMV of $80,000 and a short- term note with a $20,000 FMV. Henry's recognized gain is

A) $10,000.
B) $20,000.
C) $5,000.
D) $0.

Question 43

In accordance with the rules that apply to corporate formation, which one of the following features does not make an issue of preferred stock "nonqualified"?

A) The stock is limited and preferred as to dividends.
B) The dividend rate on the stock may not vary with interest rates, commodity prices, or other similar indices.
C) The corporation is either required to redeem the stock or is likely to exercise a right to redeem the stock.
D) The shareholder can require the corporation to redeem the stock.

Question 44

If an individual transfers an ongoing business to a corporation in a Sec. 351 exchange, the individual must recognize any realized gain

A) if the FMV of the property exchanged exceeds the FMV of the stock received.
B) if the transferor receives property other than stock.
C) only if the adjusted basis of the property transferred is less than the FMV of the stock received.
D) both A and B above

Question 45

The transferor's holding period for any stock received in exchange for a capital asset

A) includes the holding period for the property transferred.
B) begins on the day of the exchange.
C) begins on the day after the exchange.
D) none of the above

Question 46

Carolyn transfers property with an adjusted basis of $50,000 and an FMV of $60,000 in exchange for Prime Corporation stock in a Sec. 351 transaction. Carolyn's basis in the stock is

A) $0.
B) $50,000.
C) $60,000.
D) $10,000.

Question 47

Identify which of the following statements is true.

A) The character of the gain recognized by the transferor when boot is received in a Sec. 351 transaction depends on the type of boot received.
B) The receipt of property other than stock by the transferor will trigger the recognition of gain or loss under Sec. 351.
C) The definition of stock under Sec. 351 includes stock rights and warrants.
D) All of the above are false.

Question 48

Max transfers the following properties to a newly created corporation for $90,000 of stock and $10,0 in a transaction that qualifies under Sec. 351.
$\begin{array}{|l|l|l|l|}\hline & \text { Asset One } & \text { Asset Two } & \text { Asset Three } \\\hline \text { FMV } & \$ 30,000 & \$ 45,000 & \$ 25,000 \\\text { Basis } & 35,000 & 40,000 & 20,000\\\hline\end{array}$ Max's recognized gain is

A) $3,000.
B) $5,000.
C) $10,000.
D) $7,000.

Question 49

A shareholder's basis in stock received in a Sec. 351 transaction is

A) decreased by liabilities assumed by the corporation.
B) increased by the gain recognized by the corporation.
C) increased by the FMV of boot received from the corporation.
D) decreased by the gain recognized by the transferor.

Question 50

Brad forms Vott Corporation by contributing equipment, which has a basis of $50,000 and an FMV of $40,000 in exchange for Vott stock. Brad also contributes $5,000 in cash. If the transaction meets the Sec. 351 control and ownership tests, what are the tax consequences to Brad?

A) He recognizes a $10,000 loss.
B) He recognizes a $5,000 gain and a $10,000 loss.
C) He recognizes neither a gain nor a loss.
D) He recognizes a $5,000 loss.

Question 51

Under Sec. 351, corporate stock may include all of the following except

A) qualified preferred stock.
B) nonvoting stock.
C) stock warrants.
D) voting stock.

Question 52

Carmen and Marc form Apple Corporation. Carmen transfers land that is Sec. 1231 property, with an adjusted basis of $18,000 and an FMV of $20,000 in exchange for one- half of the Apple Corporation stock. Marc transfers equipment that originally costs $28,000 on which he has taken $5,000 in depreciation deductions. The equipment has an FMV of $25,000 and he receives one- half of the stock and a $5,000 short- term note. The transaction meets the requirements of Sec. 351.
Which statement below is correct?

A) Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes $5,000 as ordinary income.
B) Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes a $5,000 Sec. 1231 gain.
C) There is no recognized gain or loss.
D) Carmen recognizes no gain and Marc recognizes $2,000 as ordinary income.

Question 53

Jeremy transfers Sec. 351 property acquired three years earlier having a $100,000 basis and a $160,000 FMV to Jeneva Corporation. Jeremy receives all 200 shares of Jeneva stock having a
$140,000 FMV, and a $20,000 90- day Jeneva note. What is Jeremy's recognized gain?

A) $160,000
B) $0
C) $60,000
D) $20,000

Question 54

Matt and Sheila form Krupp Corporation. Matt contributes property with an FMV of $55,000 and a basis of $35,000. Sheila contributes property with an FMV of $75,000 and a basis of $40,000. Matt sells his stock to Paul shortly after the exchange. The transaction will

A) qualify with respect to Sheila under Sec. 351 whether Matt qualifies or not.
B) qualify under Sec. 351 only if an advance ruling has been obtained.
C) not qualify under Sec. 351.
D) qualify under Sec. 351 if Matt can show that the sale to Paul was not part of a prearranged plan.

Question 55

Identify which of the following statements is true.

A) The adjusted basis of stock received in a Sec. 351 transaction is computed by deducting the deferred loss from the FMV of the stock received.
B) If stock and boot property are both received in a Sec. 351 exchange, the transferor must allocate the total basis in the contributed property between the stock and boot property based on the relative FMVs of the stock and the boot property.
C) The holding period for stock received in a Sec. 351 transaction in exchange for a capital asset begins on the day after the date of the exchange.
D) All of the above are false.

Question 56

Sarah transfers property with an $80,000 adjusted basis and a $100,000 FMV to Super Corporation in a Sec. 351 transaction. Sarah receives stock with an $85,000 FMV and a short- term note with a $15,000 FMV. Sarah's basis in the stock is

A) $80,000.
B) $95,000.
C) $100,000.
D) $85,000.

Question 57

Ralph transfers property with an adjusted basis of $65,000 and an FMV of $70,000 to Lake Corporation in a Sec. 351 transaction. Ralph receives stock worth $60,000 and a short- term note having a $10,000 FMV. Ralph's basis in the stock is

A) $60,000.
B) $75,000.
C) $65,000.
D) $70,000.

Question 58

Henry transfers property with an adjusted basis of $95,000 and an FMV of $100,000 to a newly formed corporation in a Sec. 351 exchange. Henry receives stock with an FMV of $85,000 and a short- term note with a $15,000 FMV. Henry's basis in the stock is

A) $95,000.
B) $100,000.
C) $90,000.
D) $85,000.

Question 59

Jerry transfers two assets to a corporation as part of a Sec. 351 exchange. The first asset has an adjusted basis of $70,000 and an FMV of $50,000. The second asset has an adjusted basis of $70,000 and an FMV of $150,000. The FMV of the stock received is $180,000, and he also receives $20,000 cash. The realized and recognized gain on the second asset is

A) $80,000 realized; $20,000 recognized.
B) $10,000 realized; $10,000 recognized.
C) $80,000 realized; $15,000 recognized.
D) $20,000 realized; $10,000 recognized.

Question 60

Identify which of the following statements is true.

A) If more than one asset is transferred by the transferor in a Sec. 351 nonrecognition transaction, the transferor is assumed to have received a proportionate share of the stock, cash, and other boot property for each property transferred based upon the assets' relative FMVs.
B) The transferor's basis for any noncash boot property received in a Sec. 351 transaction is the boot's FMV reduced by any unrecognized gain.
C) To determine a shareholder's basis in a single class of stock received in a Sec. 351 exchange, the FMV of the stock received must be known.
D) All of the above are false.

Question 61

In which of the following independent situations is the Sec. 351 control requirement met?
a) Jane transfers property to Jet Corporation for 75% of Jet Corporation's stock, and Susan provides services to J Corporation for the remaining 25% of Jet Corporation stock.
b) Paul transfers property to Pride Corporation for 60% of Pride's stock, and Bob transfers property worth $15,0 performs services worth $25,000 for the remaining 40% of Pride's stock.
c) Herb and his wife Carolyn each have owned 50% of the 100 outstanding shares of Wykert Corporation stock was formed three years ago. In the current year, their daughter, Cindy, transfers property to Wykert Corporation newly issued shares of Wykert stock.
d) John and Pam develop a plan to form PJ Corporation on May 2 of this year. John transfers property worth $5 for 50 shares of PJ Corporation stock. As part of the single plan to incorporate, Pam transfers $50,000 cash for 50 of PJ Corporation stock on July 1.
e) Assume the same facts as in Part (d), except that John has a prearranged plan to sell 30 of his shares to Steven September 1.

Question 62

Phil and Nick form Philnick Corporation. Phil exchanges cash and other property for 900 shares (90% of the outstanding shares) of Philnick stock. Nick performs accounting services in exchange for 100 shares of Philnick stock worth $10,000. What are the tax consequences from forming the Philnick Corporation to Phil and Nick?

Question 63

Beth transfers an asset having an FMV of $200,000 and an adjusted basis of $150,000 to ABC Corporation in a Sec. 351 transaction. Beth receives in exchange ABC common stock having an FMV of $175,000 and Zeus Corporation common stock (a capital asset) having an FMV of $25,000 and a basis of $10,000 to ABC Corporation. ABC Corporation must recognize

A) a $50,000 capital gain.
B) no gain.
C) a $15,000 capital gain.
D) a $25,000 capital gain.

Question 64

Chris transfers land with a basis of $40,000 to Webb Corporation in exchange for 100% of Webb's stock. At the date of the transfer, the land had a $30,000 fair market value. Absent an election by Chris, Webb's basis in the land is

A) $40,000.
B) $30,000.
C) $35,000.
D) none of the above

Question 65

Lynn transfers land having a $50,000 adjusted basis, an $80,000 FMV, and $10,000 cash to Allied Corporation in exchange for 100% of Allied's stock. The corporation assumes the $70,000 mortgage on the land. Which of the following statements is correct?

A) Lynn recognizes no gain and the stock basis is $60,000.
B) Lynn recognizes a $10,000 gain and the stock basis is zero.
C) Lynn recognizes no gain and the stock basis is $50,000.
D) Lynn recognizes a $10,000 gain and the stock basis is $60,000.

Question 66

Silvia transfers to Leaf Corporation a machine she had purchased a year ago for $50,000. The machine has a $40,000 adjusted basis and a $55,000 FMV on the transfer date. $10,000 in depreciation was claimed by Silvia prior to the transfer. Silvia receives all 1,000 shares of Leaf Corporation stock worth $50,000 and a two- year note with a $5,000 FMV. What is the amount and character of the recognized gain or loss?

A) $5,000 capital gain
B) $15,000 capital gain
C) $15,000 ordinary income
D) $5,000 ordinary income

Question 67

The transferor's holding period for any boot property received in a Sec. 351 stock exchange

A) begins on the day of the exchange.
B) begins on the day after the exchange.
C) includes the holding period for the boot transferred.
D) is the same as the holding period of the stock received in the exchange.

Question 68

The transferee corporation's basis in property received in a Sec. 351 exchange is

A) the transferor's basis for the property plus gain recognized by the transferee corporation.
B) the transferor's basis for the property plus gain recognized by the transferor.
C) the FMV of the property received.
D) the transferee corporation's basis in the stock exchanged.

Question 69

Mario and Lupita form a corporation in a transaction coming under Sec. 351. Lupita transfers property with an adjusted basis of $150,000 and an FMV of $200,000 in exchange for one- half of the stock. The property has an $80,000 mortgage, which the corporation assumes. The corporation's basis in the property is

A) $80,000.
B) $200,000.
C) $130,000.
D) $150,000.

Question 70

A medical doctor incorporates her medical practice, which is operated as a sole proprietorship. The proprietorship uses the cash method of accounting. Among the assets contributed to the new corporation are unrealized receivables worth $40,000. The receivables are collected by the corporation. Which of the following statements is correct?

A) The $40,000 of receivables is included as ordinary income in the corporation's income tax return when collected.
B) The $40,000 of receivables is included as ordinary income on the doctor's personal income tax return when collected by the corporation.
C) The $40,000 of receivables is included as ordinary income in the corporation's income tax return at the time of incorporation.
D) The doctor must include the $40,000 as ordinary income in her personal income tax return at the time of incorporation.

Question 71

Colleen operates a business as a sole proprietorship. She purchased a computer for $10,000 last year. The computer is five- year recovery property for MACRS purposes and is depreciated under the regular MACRS rules. This year, Colleen incorporates the business and transfers the computer to the new corporation on July 20. The depreciation on the computer for this year allocable to the sole proprietorship is

A) $1,600.
B) $500.
C) $1,333.
D) $1,868.

Question 72

Jeremy operates a business as a sole proprietorship. The proprietorship uses the cash method of accounting. He decides to incorporate and transfers the assets and liabilities of the sole proprietorship to the newly formed corporation in exchange for its stock. The assets, which include $10,000 of accounts receivable with a zero basis, have a basis of $20,000 and an FMV of $40,000. The liabilities include accounts payable of $12,000, which will be deductible when paid, and a note payable on medical equipment of $7,000. Jeremy's basis for his stock is

A) $13,000.
B) $8,000.
C) $20,000.
D) $40,000.

Question 73

Maria has been operating a business as a sole proprietorship for several years. She needs additional capital and wants to incorporate her business. The assets of her business (building, land, inventory, and so on) have a
$400,000 adjusted basis and a $1.5 million FMV. Maria is willing to exchange the assets for 1,500 shares of Metro Corporation stock, each having a $1,000 FMV. Bill and John are each willing to invest $500,000 in Maria's business and will each receive 500 shares of stock. Why is Sec. 351 important to Maria? Does it matter to Bill and John?

Question 74

Mario and Lupita form a corporation in a transaction coming under Sec. 351. Lupita transfers property with an adjusted basis of $150,000 and an FMV of $200,000 in exchange for one- half of the stock. The property has an $80,000 mortgage, which the corporation assumes. Lupita has a recognized gain of

A) $100,000.
B) $80,000.
C) $50,000.
D) $0.

Question 75

Identify which of the following statements is true.

A) The assignment of income doctrine does not apply if the transferor in a Sec. 351 exchange in which no gain is otherwise recognized transfers when a sole proprietor transfers substantially all the assets and liabilities of the transferor's trade or business to a controlled corporation.
B) The assignment of income doctrine is a legislative requirement that income be taxed to the person who earns it.
C) The assignment of income doctrine requires a cash method of accounting for a transferor/shareholder to recognize income when accounts receivable are transferred by the shareholder to the corporation in a Sec. 351 exchange in which no gain is otherwise recognized.
D) All of the above are false.

Question 76

Chris transfers land with a basis of $40,000 to Webb Corporation in exchange for 100% of Webb's stock. At the date of the transfer, the land had a $30,000 fair market value. Chris makes an election to reduce his basis in Webb's stock to $30,000, so Webb's basis in the land is

A) $35,000.
B) $40,000.
C) $30,000.
D) none of the above

Question 77

Identify which of the following statements is true.

A) A corporation receiving property in a Sec. 351 exchange can select any MACRS depreciation method for the asset.
B) The transferor must recapture depreciation when exchanging Sec. 1245 property in all transactions coming under Sec. 351.
C) When depreciable property is transferred to a corporation in a Sec. 351 exchange in which no gain is recognized, the corporation must continue to use the transferor's depreciation method and recovery period for the property.
D) All of the above are false.

Question 78

Martin operates a law practice as a sole proprietorship using the cash method of accounting. Martin incorporates the law practice and transfers the following items to a new, solely owned corporation. $$\begin{array} { | l | c | c | } \hline & \text { Adjusted Basis } & \text { FMV } \\\hline \text { Cash } & \$ 10,000 & \$ 10,000 \\\text { Equipment } & 80,000 & 100,000 \\\text { Accounts receivable } & 0 & 120,000 \\\text { Accounts payable (deductible expenses) } & 0 & 60,000 \\\text { Note payable (on equipment) } & 50,000 & 50,000 \\\hline\end{array}$$ Martin must recognize a gain of and has a stock basis of :

A) $20,000; $40,000
B) $20,000; $30,000
C) $0; $40,000
D) $0; $30,000

Question 79

Identify which of the following statements is true.

A) A corporation must recognize a loss when transferring noncash boot property that has declined in value and its stock to a transferor as part of a Sec. 351 exchange.
B) Section 351 provides for nonrecognition of gain for the transferee corporation when it distributes appreciated land that is boot property to a shareholder.
C) The transferee corporation's holding period for assets acquired in an exchange meeting the Sec. 351 requirements includes the transferor's holding period for the property.
D) All of the above are false.

Question 80

Identify which of the following statements is true.

A) When a transferor exchanges a mortgaged property under Sec. 351 and the amount of the mortgage is greater than the transferor's basis in the property, the transferor's basis in the stock received will be equal to the basis the transferor had in the mortgaged property.
B) The transferee corporation's acquisition or assumption of liabilities in excess of the total adjusted bases of the properties transferred by a transferor results in a gain recognition by the transferor.
C) When forming a corporation, the accounts payable of a transferor's business are not liabilities for gain computation purposes if the transferor's business uses the accrual method of accounting.
D) All of the above are false.