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

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.

Accepted Answer

Section 357(b) of the Internal Revenue Code provides an exception to the general rule that a corporation's transfer of property to shareholders in exchange for their stock will result in taxable gain. The exception applies when the corporation distributes property pro rata to its shareholders in a transaction that is not essentially a device for the distribution of earnings and profits but that satisfies a bona fide business requirement. The requirement can be easily satisfied as long as the liability arose in the normal course of conducting the business that is incorporated.

Question 3

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

The answer of When a taxpayer incorporates her business,she transfers...

Question 4

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 5

Carl and Ben form Condor Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Condor.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 Condor.Both Carl and Ben will have a tax basis of $50,000 in their stock in Condor Corporation.

Accepted Answer

The answer of Carl and Ben form Condor Corporation.Carl transfers...

Question 6

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 7

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(b)predominates.

Accepted Answer

This is because § 357(b) deals with transfers that are not supported by a bona fide business purpose, while § 357(c) deals with transfers that exceed the basis of properties transferred. Thus, if both apply, § 357(b) takes precedence.

Question 8

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 statement about determining whether § 357(c) applies. If the liabilities exceed the bases of assets transferred, the shareholder may be subject to gain recognition under this section.

Question 9

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

According to the Internal Revenue Service (IRS), a donation of land to a corporation is not considered gross income and is not taxable.

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

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,it...

Question 12

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 13

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.

Accepted Answer

The basis in the expansion is the cost of the asset, which in this case is $1.5 million. The $1 million received from Madison County is not included in the basis calculation.

Question 14

In return for legal services rendered incident to its formation,Crimson Corporation issues stock to Greta,an attorney.Crimson cannot immediately deduct the value of this stock but must treat it as a capital expenditure.

Accepted Answer

This is because the stock issued to Greta is considered compensation for legal services rendered, rather than a deductible expense. As such, it will be treated as a capital expenditure for tax purposes.

Question 15

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.

Question 16

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 known as the formula for computing the basis of stock received in a § 351 transfer. It takes into account the appreciated property transferred, any boot received (including liabilities transferred), and any gain recognized. The resulting amount is the basis of the stock received in the transfer.

Question 17

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

Accepted Answer

Thin capitalization means that a corporation has a high proportion of debt compared to equity. If a corporation is thinly capitalized, all debt is not reclassified as equity. However, tax laws may limit the amount of interest expense that can be deducted if a corporation is considered thinly capitalized.

Question 18

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 19

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

Contributing additional cash to Osprey Corporation's capital would increase its liquidity without triggering any tax consequences.

Question 20

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

Accepted Answer

According to § 1223(1), the holding period for property received by a shareholder in exchange for stock under § 351 includes the holding period of the property transferred.

Quiz 4: Corporations: Organization and Capital Structure