Question 1

Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of $50,000, while Maria transfers a proprietary formula (basis of $0; fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.

Accepted Answer

Both cash and property can be contributed to a corporation in exchange for stock without recognizing gain as long as certain requirements are met, such as both the value of the property and the stock received are properly reported. Therefore, Gabriella and Maria will not recognize gain on their transfers.

Question 2

In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder.

Accepted Answer

In a § 351 transfer, if a shareholder receives boot and realizes a loss, the loss is not recognized, and the entire amount of the boot ($10,000 in this case) is taxed to the shareholder.

Question 3

The control requirement under § 351 requires that the person or persons transferring property to the corporation, immediately after the transfer, own stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

Accepted Answer

This is a correct statement about the control requirement under § 351 of the Internal Revenue Code. The transferors must collectively own at least 80% of the total voting power and 80% of the total shares of each class of stock immediately after the transfer in order for it to qualify as a tax-free transaction.

Question 4

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

Accepted Answer

According to § 351 of the Internal Revenue Code, if property is transferred to a corporation in exchange for its stock, the taxpayer is not allowed to recognize a loss on the transfer.

Question 5

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000.

Accepted Answer

Under § 351 of the Internal Revenue Code, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation, and immediately after the exchange, such person or persons are in control (meaning ownership of at least 80% of both the stock and voting power) of the corporation. The rule applies regardless of whether the property transferred has appreciated or depreciated in value, meaning Tina cannot recognize her realized loss of $10,000 upon transferring her sole proprietorship assets to the corporation.

Question 6

Ruth transfers property worth $200,000 (basis of $60,000) to Goldfinch Corporation. In return, she receives 80% of its stock (worth $180,000) and a long-term note, executed by Goldfinch and made payable to Ruth (worth $20,000). Ruth will recognize no gain on the transfer.

Accepted Answer

Ruth will recognize gain to the extent of the lesser of the gain realized or the fair market value of the "boot" received, which in this case is the long-term note worth $20,000. The gain realized is the difference between the fair market value of the property transferred ($200,000) and its basis ($60,000), which is $140,000. Since she received a note worth $20,000, she must recognize $20,000 as gain.

Question 7

Because services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

Accepted Answer

This statement is correct according to the rules of § 351. Services are not considered property and therefore, any stock received for services rendered must be reported as income at their fair market value.

Question 8

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

Accepted Answer

The transfer of an installment obligation in a transaction qualifying under § 351 is not a disposition of the obligation that causes gain to be recognized by the transferor. Instead, the transferor takes a carryover basis in the obligation, and any gain or loss will be recognized when payments are received in the future.

Question 9

In order to retain the services of Eve, a key employee in Ted's sole proprietorship, Ted contracts with Eve to make her a 30% owner. Ted incorporates the business receiving in return 100% of the stock. Three days later, Ted transfers 30% of the stock to Eve. Under these circumstances, § 351 will not apply to the incorporation of Ted's business.

Accepted Answer

The answer of In order to retain the services of...

Question 10

A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation.

Accepted Answer

A person who performs services for a corporation in exchange for stock can be treated as a member of the transferring group if that person also transfers property to the corporation, as long as the property transfer is significant in relation to the service provided.

Question 11

The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.

Accepted Answer

According to the regulations under Section 351 of the Internal Revenue Code, when a transfer of appreciated property to a controlled corporation is made in exchange for nonqualified preferred stock, the transferor has to recognize gain to the extent of the fair market value of the preferred stock received.

Question 12

In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable.

Accepted Answer

According to IRS Section 351, if a transferor receives any consideration other than stock in exchange for the transfer of assets to a corporation, it may trigger tax liability for the transferor.

Question 13

If a transaction qualifies under § 351, any recognized gain is equal to the value of the boot received.

Accepted Answer

If a transaction qualifies under § 351, any recognized gain is NOT equal to the value of the boot received. The recognized gain is computed by subtracting the basis of the property transferred from the fair market value of the stock or securities received. The receipt of boot can result in a realized gain or loss, but it is not equal to the recognized gain.

Question 14

Similar to the like­kind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.

Accepted Answer

§ 351 allows for the tax-free exchange of property in certain circumstances, which can be justified under the wherewithal to pay concept, as it allows businesses to reallocate their assets without incurring additional tax liabilities that could impede their ability to pay. This is similar to the rationale behind the like-kind exchange provision, which also allows for tax-free exchanges of similar types of property.

Question 15

Allen transfers marketable securities with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Heron Corporation. In addition, he receives cash of $40,000. Allen recognizes a capital gain of $40,000 on the transfer.

Accepted Answer

Allen recognizes a capital gain of $40,000 on the transfer because the securities have a fair market value of $300,000 and an adjusted basis of $120,000, resulting in a gain of $180,000. However, he only receives 85% of the stock of Heron Corporation and cash of $40,000, so his total consideration received is less than the fair market value of the securities transferred. This does not affect the recognition of the capital gain.

Question 16

When consideration is transferred to a corporation in return for stock, the definition of "property" is important because tax deferral treatment of § 351 is available only to taxpayers who transfer property.

Accepted Answer

The statement is true. According to Section 351 of the Internal Revenue Code, in order to qualify for tax deferral treatment, the transfer to a corporation must be in exchange for "property" which includes cash, tangible or intangible property, or even services rendered.

Question 17

The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

Accepted Answer

The statement is true. Section 351 of the Internal Revenue Code can be used for transfers of property to a corporation at any time, not just during the initial formation. This can include transfers in exchange for stock after the corporation has already been formed.

Question 18

Beth forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares. Shortly thereafter, she transfers half her shares to her son, Ted. The later transfer to Ted could cause the original transfer to be taxable.

Accepted Answer

According to the tax code, if an individual transfers appreciated property to a corporation in exchange for its stock, and then transfers some of the stock to a related party, such as a family member, within two years, the initial transfer may be subject to taxation. This is known as the "disqualified person" rule. Therefore, the transfer of shares to Ted could cause the original transfer to be taxable.

Question 19

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

Accepted Answer

The answer of For § 351 purposes, stock rights and...

Question 20

Similar to like­kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

Accepted Answer

Under § 351, the receipt of "boot" (additional consideration) does not cause loss to be recognized; it can, however, trigger the recognition of gain if the amount of boot received exceeds the basis of the property transferred. Losses are generally not recognized in § 351 transactions.

Quiz 18: Corporations: Organization and Capital Structure

Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of $50,000, while Maria transfers a proprietary formula (basis of $0; fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.

In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder.

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000.

Ruth transfers property worth $200,000 (basis of $60,000) to Goldfinch Corporation. In return, she receives 80% of its stock (worth $180,000) and a long-term note, executed by Goldfinch and made payable to Ruth (worth $20,000). Ruth will recognize no gain on the transfer.

Because services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation.

The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.

In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable.

If a transaction qualifies under § 351, any recognized gain is equal to the value of the boot received.

Similar to the likekind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.

Allen transfers marketable securities with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Heron Corporation. In addition, he receives cash of $40,000. Allen recognizes a capital gain of $40,000 on the transfer.

When consideration is transferred to a corporation in return for stock, the definition of "property" is important because tax deferral treatment of § 351 is available only to taxpayers who transfer property.

The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

Beth forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares. Shortly thereafter, she transfers half her shares to her son, Ted. The later transfer to Ted could cause the original transfer to be taxable.

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

Similar to likekind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

Quiz 18: Corporations: Organization and Capital Structure

Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of $50,000, while Maria transfers a proprietary formula (basis of $0; fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.

In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder.

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000.

Ruth transfers property worth $200,000 (basis of $60,000) to Goldfinch Corporation. In return, she receives 80% of its stock (worth $180,000) and a long-term note, executed by Goldfinch and made payable to Ruth (worth $20,000). Ruth will recognize no gain on the transfer.

Because services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation.

The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.

In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable.

If a transaction qualifies under § 351, any recognized gain is equal to the value of the boot received.

Similar to the like­kind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.

Allen transfers marketable securities with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Heron Corporation. In addition, he receives cash of $40,000. Allen recognizes a capital gain of $40,000 on the transfer.

When consideration is transferred to a corporation in return for stock, the definition of "property" is important because tax deferral treatment of § 351 is available only to taxpayers who transfer property.

The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

Beth forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares. Shortly thereafter, she transfers half her shares to her son, Ted. The later transfer to Ted could cause the original transfer to be taxable.

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

Similar to like­kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

Similar to the likekind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.

Similar to likekind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.