Question 1

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.

Accepted Answer

The holding period of the land "tacks" under section 351.

Question 2

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

Accepted Answer

In tax-deferred transactions, the adjusted basis begins with the tax basis of the property exchanged in the transaction.

Question 3

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

Accepted Answer

Type A reorganizations involve a merger or consolidation of the target corporation with or into the acquiring corporation, and the transfer of assets from the target to the acquiring corporation.

Question 4

A taxpayer must receive voting common stock to be eligible for deferral in a section 351 exchange.

Accepted Answer

The stock can be voting or nonvoting, common or preferred.

Question 5

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

Accepted Answer

Gains and losses may not be recognized because they are deferred or excluded from taxable income.

Question 6

Mandel transferred property to his new corporation in a section 351 transaction. Among the several properties transferred by Mandel 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.

Accepted Answer

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.

Question 7

Tax considerations are always the primary reason for structuring an acquisition.

Accepted Answer

Nontax considerations can be more important than tax reasons.

Question 8

Gain and loss realized in a section 351 transaction will be recognized if the taxpayer receives boot in the exchange.

Accepted Answer

Only gain realized is recognized when boot is received in a section 351 transaction.

Question 9

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.

Accepted Answer

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.

Question 10

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

Accepted Answer

This is because the tax law recognizes and taxes the gain or loss only when it is realized, which means that it has been transformed into money or its equivalent through a transaction.

Question 11

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

Accepted Answer

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

Question 12

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 a taxpayer defers gain in a section 351 transaction, the tax basis of the stock received in the transaction is generally the same as the tax basis of the property transferred, reduced by any amount of gain deferred. In this case, Maria deferred $100 of gain and received stock with a fair market value of $500. Therefore, her tax basis in the stock will be $400 ($500 - $100).

Question 13

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

Accepted Answer

According to the Internal Revenue Code, property includes money, securities, and any other property that has a fair market value. Therefore, in a section 351 transaction, the transfer of money is considered as transfer of property.

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

In a section 351 transaction, if a taxpayer receives boot (property other than stock) in exchange for contributing property to a corporation, the taxpayer's tax basis in the boot will equal its fair market value, not the taxpayer's adjusted basis in the property contributed. This is known as the "substituted basis" rule.

Question 15

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.

Accepted Answer

Control also requires ownership of 80 percent or more of each class of nonvoting stock.

Question 16

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.

Accepted Answer

The stock generally takes a substituted basis equal to the tax basis in the shareholder's stock in the target corporation.

Question 17

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

Accepted Answer

A section 338 transaction allows the buyer to elect to treat the purchase of stock as a purchase of assets for tax purposes, resulting in potentially favorable tax consequences for both the buyer and the seller.

Question 18

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.

Accepted Answer

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.

Question 19

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.

Accepted Answer

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.

Question 20

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.

Accepted Answer

The group of taxpayers transferring property must in the aggregate meet the 80 percent ownership tests.

Quiz 19: Corporate Formation, Reorganization, and Liquidation