Question 1

Jamie transferred 100 percent of her stock in Fox Company to Otter Corporation in a Type A merger. In exchange, she received stock in Otter with a fair market value of $400,000 plus $600,000 in cash. Jamie's tax basis in the Fox stock was $600,000. What amount of gain does Jamie recognize in the exchange and what is her basis in the Otter stock she receives?

Accepted Answer

Jamie recognizes a gain of $400,000, which is the amount of cash received ($600,000), because the transaction is partially a sale due to the receipt of cash. The basis in the Otter stock she receives is equal to the fair market value of the stock received, which is $400,000.

Question 2

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 3

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 an existing sole 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 equals the shareholder's basis in the property transferred.

Question 4

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

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

Question 5

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 state that if the aggregate basis of all property transferred to a corporation exceeds the aggregate fair market value of the property, the aggregate tax basis in the hands of the corporation cannot exceed the aggregate fair market value of the property. This means that the corporation will have a built-in loss equal to the excess of tax basis over fair market value. This is designed to prevent shareholders from transferring property to a corporation solely for the purpose of realizing a tax loss. Option A is incorrect because it only applies when the basis exceeds the fair market value of a specific property, not the aggregate. Option B is incorrect because it does not consider the fair market value of the property. Option D is incorrect because it allows the tax basis to exceed the fair market value, which is not permitted under the built-in loss rules.

Question 6

Jasmine transferred 100 percent of her stock in Woodward Company to Jefferson Corporation in a Type A merger. In exchange, she received stock in Jefferson with a fair market value of $600,000 plus $400,000 in cash. Jasmine's tax basis in the Woodward stock was $1,500,000. What amount of loss does Jasmine recognize in the exchange and what is her basis in the Jefferson stock she receives?

Accepted Answer

The Type A merger is a tax-free exchange, meaning that no gain or loss is recognized on the transfer of the Woodward stock to Jefferson. Therefore, no loss is recognized by Jasmine in the exchange.

Jasmine's basis in the Jefferson stock she receives is equal to her basis in the Woodward stock, which was $1,500,000. However, she also received $400,000 in cash, which increases her basis to $1,900,000. The fair market value of the Jefferson stock she received is irrelevant for determining her basis. Therefore, the answer is D - no loss recognized and a basis in Jefferson stock of $1,100,000.

Question 7

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 8

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 9

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

Accepted Answer

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

Question 10

Which of the following principles does not need to be satisfied for an acquisition to be a tax-deferred reorganization?

Accepted Answer

In a tax-deferred reorganization, continuity of interest, continuity of business enterprise, and a business purpose must be satisfied. Continuity of purpose is not a requirement for a tax-deferred reorganization.

Question 11

Which of the following statements best describes the continuity of interest principle as it applies to a tax-deferred acquisition?

Accepted Answer

The continuity of interest principle in a tax-deferred acquisition requires that shareholders in the aggregate receive a significant portion of the consideration in the form of equity of the acquiring company. While the specific percentage can vary by jurisdiction and specific tax rules, the principle is that a substantial part of the consideration must be in the form of stock to ensure that the shareholders of the acquired company maintain a continuing interest in the combined entity, thus allowing the transaction to qualify as a tax-deferred reorganization. Option B correctly captures the essence of this principle without specifying an exact percentage, which can vary.

Question 12

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 describes a motivation by the buyer, but not by the seller. The other options describe motivations by either the buyer or the seller in the acquisition or sale of a company.

Question 13

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 14

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, when property is transferred to a corporation in exchange for stock, no gain or loss is recognized if certain requirements are met, including that the transferor must receive "stock" in the exchange. Here, Amy transferred property worth $600, with a basis of $900, to the corporation and received stock worth $450 in exchange. The corporation also assumed a $150 liability associated with the property.

To calculate Amy's tax basis in the stock received, we start with the basis in the property transferred ($900) and subtract any liabilities assumed by the corporation ($150). That gives us an adjusted basis of $750. Therefore, Amy's tax basis in the stock received is $750.

Question 15

Which of the following statements best describes the application of the continuity of enterprise principle to a Type A tax-deferred reorganization?

Accepted Answer

The continuity of business enterprise principle must be satisfied for only the target corporation in a Type A tax-deferred reorganization. This means that the target corporation must continue its historic business operations after the reorganization without a significant change in ownership or control.

Question 16

Which of the following statements best describes the tax consequences of a §338 election?

Accepted Answer

A §338 election allows the buyer to treat a stock purchase as an asset purchase for tax purposes, resulting in a stepped-up basis in the assets acquired. The acquired corporation recognizes gain or loss on the deemed sale of its assets.

Question 17

Simone transferred 100 percent of her stock in Purple Company to Plum Corporation in a Type A merger. In exchange, she received stock in Plum with a fair market value of $500,000 plus $500,000 in cash. Simone's tax basis in the Purple stock was $200,000. What amount of gain does Simone recognize in the exchange and what is her basis in the Plum stock she receives?

Accepted Answer

The answer of Simone transferred 100 percent of her stock...

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

The answer of Sami transferred property with a fair market...

Question 19

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 20

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.

Quiz 8: Corporate Formation, Reorganization, and Liquidation

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?

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?

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

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

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

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

Which of the following principles does not need to be satisfied for an acquisition to be a tax-deferred reorganization?

Which of the following statements best describes the continuity of interest principle as it applies to a tax-deferred acquisition?

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

Which of the following statements best describes the application of the continuity of enterprise principle to a Type A tax-deferred reorganization?

Which of the following statements best describes the tax consequences of a §338 election?

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

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