Question 1

Maria defers $100 of gain realized in a section 351 transaction. The stock she receives in the exchange has a fair market value of $500. Maria's tax basis in the stock will be $400.

Accepted Answer

When gain is deferred in a section 351 transaction, the tax basis in the stock received is equal to the tax basis in the property transferred, decreased by any boot received, and increased by the amount of gain recognized in the transaction. In this case, Maria's tax basis in the stock will be $400, calculated as follows: Tax basis in property transferred ($100) - boot received ($0) + gain recognized ($400) = tax basis in stock received ($400).

Question 2

In a tax-deferred transaction, the calculation of a taxpayer's tax basis in property always begins with its cost to the taxpayer.
In tax-deferred transactions, the adjusted basis begins with the tax basis of the property exchanged in the transaction.

Accepted Answer

In tax-deferred transactions, the adjusted basis of the property received begins with the tax basis of the property exchanged, not necessarily the cost to the taxpayer.

Question 3

Control as it relates to a section 351 transaction is strictly defined to be 80 percent or more of the voting power of the stock of the corporation to which property is transferred.
Control also requires ownership of 80 percent or more of each class of nonvoting stock.

Accepted Answer

False

Question 4

The definition of property as it relates to a section 351 transaction includes money.

Accepted Answer

According to the IRS, property that can be transferred in a section 351 transaction includes money, securities, and other assets. Therefore, the statement is true.

Question 5

The shareholders in the target corporation always receive a tax basis in the stock received from the acquirer equal to the stock's fair market value.
The stock generally takes a substituted basis equal to the tax basis in the shareholder's stock in the target corporation.

Accepted Answer

The shareholders in the target corporation generally receive a substituted basis in the stock received from the acquirer, which is equal to their tax basis in the stock of the target corporation, not the fair market value.

Question 6

Continuity of interest as it relates to a tax reorganization focuses on the aggregate equity received by the shareholders of the target corporation in the transaction.
The regulations require the target shareholders to receive, in the aggregate, stock with a fair market value of at least 40 percent of the value of the property transferred in the exchange.

Accepted Answer

This is a true statement regarding continuity of interest in a tax reorganization. The regulations do require the target shareholders to receive, in the aggregate, stock with a fair market value of at least 40 percent of the value of the property transferred in the exchange to maintain continuity of interest.

Question 7

A stock-for-stock Type B reorganization will be tax-deferred to a target corporation shareholder as long as at least 80 percent of the consideration received is in the form of stock of the acquirer.
No boot is allowed in a Type B reorganization. Additional consideration of as little as $1 can taint the transaction and cause it to be fully taxable.

Accepted Answer

The answer of A stock-for-stock Type B reorganization will be...

Question 8

Tax considerations are always the primary reason for structuring an acquisition.
Nontax considerations can be more important than tax reasons.

Accepted Answer

While tax considerations are often a significant factor in the decision-making process for structuring an acquisition, they are not always the primary reason. Other factors such as strategic fit, market position, and operational synergies may take precedence over tax considerations.

Question 9

Type A reorganizations involve the transfer of assets of targets corporation via a merger or consolidation.

Accepted Answer

Type A reorganizations involve the transfer of assets of targets corporation via a merger or consolidation.

Question 10

To meet the control test under section 351, taxpayers transferring property to a corporation must in aggregate own 80 percent or more of the corporation's voting stock and 80 percent of each class of nonvoting stock after the transfer.
The group of taxpayers transferring property must in the aggregate meet the 80 percent ownership tests.

Accepted Answer

This statement is correct. To meet the control test under section 351, the group of taxpayers transferring property needs to own at least 80% of the corporation's voting stock and 80% of each class of nonvoting stock after the transfer.

Question 11

A section 338 transaction is a stock acquisition treated as an asset acquisition based on an election made by the acquirer.

Accepted Answer

In a Section 338 transaction, the acquirer makes an election to treat the stock acquisition as an asset acquisition for tax purposes. This allows the acquirer to step-up the tax basis of the acquired assets to fair market value, resulting in potential tax savings.

Question 12

Mandel transferred property to his new corporation in a section 351 transaction. One of the properties transferred was land with a fair market value of $200,000 and a tax basis of $250,000. In all cases, the corporation will always take a tax basis in the land of $200,000 to prevent the "built-in loss" from being transferred from Mandel to the corporation.
The built-in loss rules only apply if the aggregate fair market value of the properties transferred is less than the aggregate tax basis of the properties transferred.

Accepted Answer

The built-in loss rules also apply if the fair market value of any property transferred is less than its tax basis. In this case, there is a built-in loss of $50,000 ($200,000 fair market value - $250,000 tax basis), so the corporation's tax basis in the land will be $200,000 to prevent the transfer of the built-in loss.

Question 13

M Corporation assumes a $200 liability attached to property transferred to it by Jane in a section 351 transaction. In all cases, the assumed liability will be treated as boot received by Jane.
A liability assumed by a corporation in a section 351 transaction is only treated as boot if the liability is assumed for tax avoidance purposes.

Accepted Answer

The statement is incorrect as the assumption of a liability in a section 351 transaction is treated as boot regardless of the reasons for the assumption.

Question 14

A taxpayer always will have a tax basis in boot received in a section 351 transaction equal to its fair market value.

Accepted Answer

Boot received in a section 351 transaction, such as property or cash, is generally taxable to the extent of the lesser of its fair market value or the amount of the realized gain on the transfer. Therefore, the taxpayer's tax basis in the boot received will be equal to its fair market value.

Question 15

Generally, before gain or loss is realized for tax purposes, the taxpayer must engage in a transaction.

Accepted Answer

Generally, a transaction is required for gain or loss to be realized for tax purposes. Exceptions to this include certain involuntary conversions or other special rules outlined by the tax code.

Question 16

The requirements for tax deferral in a forward triangular merger and a reverse triangular merger are the same.
The requirements for tax deferral in a reverse triangular merger are more restrictive than in a forward triangular merger.

Accepted Answer

The answer of The requirements for tax deferral in a...

Question 17

Gain and loss realized in a section 351 transaction will be recognized if the taxpayer receives boot in the exchange.
Only gain realized is recognized when boot is received in a section 351 transaction.

Accepted Answer

The answer of Gain and loss realized in a section...

Question 18

Gain or loss is always recognized when realized for tax purposes.

Accepted Answer

The answer of Gain or loss is always recognized when...

Question 19

Han transferred land to his corporation in a section 351 transaction. Han had held the land for two years prior to the transfer. The corporation will tack Han's holding period for the land.
The holding period of the land "tacks" under section 351.

Accepted Answer

When a taxpayer transfers property to a corporation in a section 351 transaction, the corporation generally takes over the taxpayer's basis in the property and the holding period of the property "tacks" to that of the taxpayer. This is provided in Section 1223(2) of the Internal Revenue Code. Therefore, in this case, the holding period of the land will tack under section 351.

Question 20

A taxpayer must receive voting common stock to be eligible for deferral in a section 351 exchange.
The stock can be voting or nonvoting, common or preferred.

Accepted Answer

The statement is false. A taxpayer can receive either voting or nonvoting stock, common or preferred, in a section 351 exchange and still be eligible for deferral.

Quiz 8: Corporate Formation, Reorganization, and Liquidation

Maria defers $100 of gain realized in a section 351 transaction. The stock she receives in the exchange has a fair market value of $500. Maria's tax basis in the stock will be $400.

In a tax-deferred transaction, the calculation of a taxpayer's tax basis in property always begins with its cost to the taxpayer. In tax-deferred transactions, the adjusted basis begins with the tax basis of the property exchanged in the transaction.

Control as it relates to a section 351 transaction is strictly defined to be 80 percent or more of the voting power of the stock of the corporation to which property is transferred. Control also requires ownership of 80 percent or more of each class of nonvoting stock.

The definition of property as it relates to a section 351 transaction includes money.

The shareholders in the target corporation always receive a tax basis in the stock received from the acquirer equal to the stock's fair market value. The stock generally takes a substituted basis equal to the tax basis in the shareholder's stock in the target corporation.

Tax considerations are always the primary reason for structuring an acquisition. Nontax considerations can be more important than tax reasons.

Type A reorganizations involve the transfer of assets of targets corporation via a merger or consolidation.

A section 338 transaction is a stock acquisition treated as an asset acquisition based on an election made by the acquirer.

A taxpayer always will have a tax basis in boot received in a section 351 transaction equal to its fair market value.

Generally, before gain or loss is realized for tax purposes, the taxpayer must engage in a transaction.

The requirements for tax deferral in a forward triangular merger and a reverse triangular merger are the same. The requirements for tax deferral in a reverse triangular merger are more restrictive than in a forward triangular merger.

Gain and loss realized in a section 351 transaction will be recognized if the taxpayer receives boot in the exchange. Only gain realized is recognized when boot is received in a section 351 transaction.

Gain or loss is always recognized when realized for tax purposes.

Han transferred land to his corporation in a section 351 transaction. Han had held the land for two years prior to the transfer. The corporation will tack Han's holding period for the land. The holding period of the land "tacks" under section 351.

A taxpayer must receive voting common stock to be eligible for deferral in a section 351 exchange. The stock can be voting or nonvoting, common or preferred.