Question 1

Amy transfers property with a tax basis of $1,455 and a fair market value of $1,095 to a corporation in exchange for stock with a fair market value of $850 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $245 on the property transferred. What is Amy's tax basis in the stock received in the exchange?

Accepted Answer

Under section 351, when property is transferred to a corporation in exchange for stock and the transferors receive stock in return, the transferors do not recognize any gain or loss on the transfer. Instead, their tax basis in the stock received is equal to the tax basis of the property transferred plus any liabilities assumed by the corporation.

In this case, Amy's tax basis in the property transferred is $1,455, and the corporation assumed a liability of $245, so her tax basis in the stock received is $1,455 + $245 = $1,700. However, the fair market value of the stock received is only $850, so Amy's tax basis in the stock is limited to that amount. Therefore, her tax basis in the stock received is $850.

Choice B is the correct answer.

Question 2

Which of the following statements best describes the tax benefits that arise from the sale of §1244 stock?

Accepted Answer

§1244 allows an individual shareholder to deduct up to $50,000 ($100,000 for married filing jointly) of the loss from the sale of the stock as an ordinary loss in the year of the sale, rather than as a capital loss.

Question 3

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in cash in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle's tax basis in the stock received in the exchange?

Accepted Answer

Rachelle's tax basis in the stock is calculated as the original basis of the property transferred ($800) minus the cash received ($50) and the liability assumed by the corporation ($100), resulting in a basis of $700.

Question 4

Which of the following statements best describes the impact of receiving boot in a §351 transaction?

Accepted Answer

Boot received in a §351 transaction causes the shareholder to recognize gain to the extent of the lesser of the gain realized or the boot received, but it does not allow for the recognition of a loss.

Question 5

Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 in cash in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil's tax basis in the stock received in the exchange?

Accepted Answer

The answer of Sybil transfers property with a tax basis...

Question 6

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

Accepted Answer

The corporation's tax basis in the property received in the exchange is the sum of the adjusted basis of the property ($800) and any liability assumed by the corporation ($100), or $900. However, the fair market value of the stock and cash received is only $800 ($750 + $50), so the corporation's tax basis in the property received is limited to that amount. Therefore, the corporation's tax basis in the property received is $800, plus the amount of the liability assumed ($100), minus the amount of cash received ($50), or $850.

Question 7

Tristan transfers property with a tax basis of $1,015 and a fair market value of $1,520 to a corporation in exchange for stock with a fair market value of $1,015 and $378 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $127 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

Accepted Answer

In a section 351 exchange, the corporation's tax basis in the property received is equal to the transferor's tax basis plus any liabilities assumed by the corporation. Therefore, the corporation's tax basis in the property received in this exchange is $1,015 (Tristan's tax basis) + $127 (liability assumed by the corporation) = $1,142.

Question 8

Which of the following statements best describes the tax results to a shareholder in a §351 transaction when liabilities on property transferred to the corporation are assumed by the corporation?

Accepted Answer

The answer of Which of the following statements best describes...

Question 9

Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

Accepted Answer

When property is transferred to a corporation in exchange for stock in a transaction that qualifies for deferral under Section 351, the transferor's tax basis in the stock received is equal to the tax basis of the property transferred, reduced by any liabilities assumed by the corporation. In this case, Ashley's tax basis in the stock received would be $5,000 (tax basis of the property transferred) - $500 (liability assumed by the corporation) = $4,500. However, since the fair market value of the stock received is only $2,000, Ashley's tax basis in the stock is limited to $2,000, which is the amount of boot received. Therefore, the correct answer is B) $4,000.

Question 10

Which of the following classes of stock is not allowed to be used in a §351 transaction?

Accepted Answer

All of these classes of stock can be used in a §351 transaction. Section 351 allows for the transfer of property to a corporation by one or more persons in exchange for stock in that corporation, and it does not exclude any specific class of stock (voting common, voting preferred, or nonvoting preferred) from being used in such transactions.

Question 11

Amy transfers property with a tax basis of $900 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $450 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is Amy's tax basis in the stock received in the exchange?

Accepted Answer

Under section 351, Amy will not recognize any gain or loss on the transfer of property to the corporation in exchange for stock as long as she receives stock with a “substantially equivalent” value. In this case, she receives stock with a fair market value of $450, which is within the “substantially equivalent” range. 
To determine her tax basis in the stock received, we start with the property’s basis of $900 and subtract any liabilities assumed by the corporation, which in this case is $150. This gives us an adjusted basis of $750 for the property transferred. Since Amy received stock with a fair market value of $450, her tax basis in the stock is equal to the adjusted basis of the property transferred minus the fair market value of the stock received, or $750 - $450 = $300. Therefore, the correct answer is B.

Question 12

Which of the following statements best describes the tax consequences that arise from a contribution of capital to a corporation by an existing sole shareholder?

Accepted Answer

When a shareholder contributes capital to a corporation, there is no recognition of gain or loss by the shareholder. The corporation's basis in the property transferred is equal to the shareholder's basis in the property transferred. This basis becomes important when the corporation sells the property or depreciates it.

Question 13

Which of the following statements best describes a §338 transaction?

Accepted Answer

A §338 transaction is an election made by the buyer to treat a stock acquisition as an asset acquisition. This allows the buyer to obtain a step-up in the tax basis of the assets acquired which can result in significant tax savings. In a §338 transaction, the buyer is treated as if they purchased the assets of the target company instead of the stock. This allows the buyer to obtain a step-up in the tax basis of the assets acquired which can result in significant tax savings.

Question 14

Which of the following statements best describes the "built-in loss" rules that apply to property transferred to a corporation under §351?

Accepted Answer

The built-in loss rules under §351 apply when the aggregate basis of all property transferred to a corporation exceeds its aggregate fair market value. In this case, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate fair market value of the property. This is to prevent shareholders from transferring property with high tax bases and claiming losses that exceed the actual economic loss incurred by the corporation. Option A and B are incorrect because they do not take into account the aggregate basis of all property transferred. Option D is incorrect because it allows for the tax basis of the property in the hands of the corporation to exceed its fair market value, which goes against the built-in loss rule.

Question 15

Ashley transfers property with a tax basis of $7,430 and a fair market value of $4,985 to a corporation in exchange for stock with a fair market value of $2,445 and $1,130 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $1,410 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

Accepted Answer

Ashley's tax basis in the stock received is calculated by starting with her original basis in the property transferred ($7,430), then subtracting the cash received ($1,130), and also subtracting the liability assumed by the corporation ($1,410). This results in a new basis of $4,890 ($7,430 - $1,130 - $1,410 = $4,890).

Question 16

Which of the following statements does not describe a motivation by the buyer or seller in the acquisition or sale of a company?

Accepted Answer

Option B is false as it states that buyers prefer to buy stocks, which is not usually the case as buying stocks means the buyer is acquiring the ownership of the entire company with its underlying assets, liabilities, and potentially unknown legal obligations. Buyers usually prefer to buy assets to minimize potential liabilities and risks associated with the company they are acquiring.

Question 17

Which of the following statements best describes the concept of control as it applies to a §351 transaction?

Accepted Answer

The answer of Which of the following statements best describes...

Question 18

Sami transferred property with a fair market value of $600 and a tax basis of $300 to a corporation in exchange for stock with a fair market value of $600. In addition, Sami received stock with a fair market value of $50 in exchange for services she provided to the corporation in the incorporation process. Which of the following statements best describes the tax result to Sami because of the exchanges?

Accepted Answer

Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under §351.

Question 19

Rachelle transfers property with a tax basis of $825 and a fair market value of $1,300 to a corporation in exchange for stock with a fair market value of $700 and $214 incash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $386 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

Accepted Answer

The corporation's tax basis in the property received in the exchange is calculated as follows:
Fair Market Value of Stock Received: $700
Plus Cash Received: $214
Plus Assumed Liability: $386
Total Consideration: $1,300
Since this is a Section 351 transaction, Rachelle's tax basis in the stock received by her in the exchange is the same as her tax basis in the property transferred. Therefore, the corporation's tax basis in the property received is also $825.
However, since the corporation also assumed a liability of $386, we need to adjust the basis as follows:
Adjusted Basis: $825 - $386 = $439
Therefore, choice B ($1,039) is the correct answer.

Question 20

Tristan transfers property with a tax basis of $900 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $900 and $200 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

Accepted Answer

The corporation's tax basis in the property received is the transferor's adjusted basis in the property plus any gain recognized by the transferor. Here, Tristan's adjusted basis is $900. Since the liability assumed ($100) plus cash received ($200) does not exceed the fair market value of the stock received ($900), Tristan does not recognize any gain. Therefore, the corporation's basis in the property is Tristan's adjusted basis ($900) plus the liability assumed ($100), totaling $1,000. However, the correct calculation should reflect the initial basis plus gain recognized, if any. Given no gain is recognized, the oversight in explanation does not affect the outcome that the correct basis is the transferor's basis plus the liability assumed, leading to a corrected answer of $1,000, making the initial choice and explanation incorrect. The correct choice should have been C, reflecting a basis of $1,000, considering the transferor's basis and the liability assumed with no gain recognized.

Quiz 19: Corporate Formation, Reorganization, and Liquidation