Question 1

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.

Accepted Answer

In a § 351 exchange, the transferor's basis in the stock received is decreased (not increased) by the amount of the liability (such as a mortgage) assumed by the corporation. This ensures that the transferor does not recognize a gain or loss on the transfer of the property to the corporation.

Question 2

A city contributes $500,000 to a corporation as an inducement to locate in the city. Within the next 12 months, the corporation uses the money to purchase property. The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

Accepted Answer

The answer of A city contributes $500,000 to a corporation...

Question 3

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.

Accepted Answer

Additional contributions of capital from shareholders do not have tax consequences for the corporation.

Question 4

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

The answer of If both §§ 357(b) and (c) apply...

Question 5

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

Under § 351, the holding period for the stock received does not include the holding period of the inventory (land held for resale) contributed to the corporation. The holding period for the stock begins when the stock is acquired, not from when the inventory was originally held by the contributor.

Question 6

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

Accepted Answer

According to the Internal Revenue Code § 1223(1), a shareholder's holding period for stock received under § 351 can include the holding period of the property transferred to the corporation.

Question 7

In structuring the capitalization of a corporation, the tax law is neutral for the investor as to debt versus equity financing.

Accepted Answer

The tax law treats debt and equity financing differently and may provide tax advantages or disadvantages for each type of financing. For example, interest on debt payments is usually tax-deductible for the corporation, while dividends paid to shareholders are not. Therefore, the choice between debt and equity financing can have significant tax implications for both the corporation and the investor.

Question 8

Carl and Ben form Eagle Corporation. Carl transfers cash of $50,000 for 50 shares of stock of Eagle. Ben transfers proprietary information 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

This is because Carl transferred cash which has a tax basis equal to its value. However, Ben transferred proprietary information with a tax basis of zero which means his basis in the stock will also be zero.

Question 9

In general, the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer.

Accepted Answer

In a transfer that qualifies as a nontaxable exchange under § 351, the basis of the property to the corporation is generally the same as the basis in the hands of the transferor shareholder, increased by any gain recognized by the shareholder on the transfer.

Question 10

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

When a taxpayer transfers assets and liabilities to a corporation in return for its stock, if the liabilities exceed the assets' basis, it does not result in a negative basis in the stock. Instead, the excess liabilities over the basis of the assets transferred are treated as gain to the taxpayer.

Question 11

Because boot is generated under § 357(b) (i.e., the liability is not supported by a bona fide business purpose), the transferor shareholder will always have to recognize gain.

Accepted Answer

The recognition of gain due to boot in a transaction under § 357(b) is not automatic. The transferor shareholder will have to recognize gain only to the extent that the boot received exceeds the basis of the stock exchanged. The lack of a bona fide business purpose may lead to the reclassification of the liability as not assumed, but gain recognition depends on the specifics of the transaction, including the amount of boot received relative to the shareholder's basis in the exchanged property.

Question 12

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

This is the correct assessment of whether § 357(c) applies. If the liabilities exceed the bases of all assets a shareholder transfers to the corporation, then the shareholder may be required to recognize gain under § 357(c).

Question 13

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

When depreciable property is transferred to a controlled corporation under § 351, any recapture potential (such as depreciation recapture under § 1245 or § 1250) carries over to the corporation. This means the corporation may have to recognize this recapture income upon a subsequent disposition of the property.

Question 14

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.

Accepted Answer

The answer of When incorporating her sole proprietorship, Samantha transfers...

Question 15

In return for legal services worth $60,000 rendered incident to its formation, Crimson Corporation issues stock to Greta, an attorney. Crimson cannot immediately deduct the value of any of this stock but instead must capitalize it as an organizational expenditure.

Accepted Answer

This is because organizational expenditures, such as legal fees for the formation of a corporation, cannot be immediately deducted as an expense. Instead, they must be capitalized and amortized over a period of time.

Question 16

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

When a shareholder contributes property (such as land) to a corporation in exchange for stock, the corporation's basis in the property is generally the same as the shareholder's adjusted basis, just before the contribution. This rule applies even if the shareholder owns 100% of the corporation.

Question 17

Basis of appreciated property transferred minus boot received (including liabilities transferred) plus gain recognized equals basis of stock received in a § 351 transfer.

Accepted Answer

This is the correct formula for determining the basis of stock received in a § 351 transfer.

Question 18

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

The answer of To help avoid the thin capitalization problem,...

Question 19

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

The donation of land to Ecru Corporation does not result in gross income, as it is a non-taxable event per the IRS code.

Question 20

A shareholder transfers a capital asset to Red Corporation for its stock. If the transfer qualifies under § 351, Red's holding period for the asset begins on the day of the exchange.

Accepted Answer

Red Corporation's holding period for the capital asset includes the shareholder's holding period, provided the asset was a capital asset or a Section 1231 asset in the hands of the transferor.

Quiz 18: Corporations: Organization and Capital Structure