Question 1

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 2

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

When an installment obligation is transferred in a transaction qualifying under § 351, the transferor does not recognize gain or loss. Instead, the transferor's basis in the installment obligation carries over to the transferee.

Question 3

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 4

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

According to the Internal Revenue Code § 351, when property is transferred to a corporation in exchange for stock, the transaction is generally tax-free. However, services are not considered property and therefore, when someone receives stock in exchange for services rendered, they must report the fair market value of the stock as income.

Question 5

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

The control requirement under § 351 indeed 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.

Question 6

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

Accepted Answer

According to the Internal Revenue Code § 351, a taxpayer may not recognize a loss on the transfer of property in a transaction subject to § 351. This is because § 351 applies to transactions where property is transferred to a corporation in exchange for stock, and the transfer is considered to be tax-free. Therefore, recognizing a loss in such transactions would defeat the purpose of § 351.

Question 7

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

Under Section 351 of the Internal Revenue Code, the transfer of appreciated property to a controlled corporation in exchange for nonqualified preferred stock results in the recognition of gain to the transferor. This is because the nonqualified preferred stock is not considered to be equivalent to common stock, and therefore does not qualify for tax-deferred treatment under Section 351.

Question 8

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

This is because the transfer of appreciated property in exchange for all of the shares is considered a taxable event, and if Beth transfers half of her shares to her son shortly thereafter, the original transfer could be subject to taxation.

Question 9

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 10

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

The transfers of cash and the proprietary formula to Luster Corporation are tax-free contributions to the capital of the corporation, which do not result in the recognition of gain or loss.

Question 11

Similar to like-kind 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.

Question 12

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 13

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 14

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

§ 351 can be applied to later transfers of property to a corporation, not just the initial formation.

Question 15

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

Accepted Answer

According to the Internal Revenue Code section 351, if a transferor receives consideration other than stock, such as cash or property, the transaction can trigger taxable gain.

Question 16

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 17

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

Accepted Answer

Any recognized gain in a transaction qualifying under § 351 is not equal to the value of the boot received, but rather is computed as the difference between the fair market value of the property transferred and the transferor's adjusted basis in the property.

Question 18

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

Accepted Answer

Both § 1031 (like-kind exchange provision) and § 351 (transfers to corporations) allow taxpayers to defer recognition of gain or loss, which could result in a tax liability, until a future disposition of the acquired property or stock. This deferral of recognition is based on the wherewithal to pay concept, meaning that the taxpayer has not received any cash or other liquid assets in the transfer and therefore does not have the ability to pay the resulting tax liability.

Question 19

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

Tax deferral treatment of § 351 is indeed available only to taxpayers who transfer property, not to those who transfer services or other non-property items. Therefore, the definition of "property" is crucial in determining if § 351 applies.

Question 20

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

When marketable securities are transferred in exchange for stock and cash, it is considered a taxable event, and any gain on the transfer is recognized as a capital gain. In this case, Allen has a gain of $180,000 ($300,000 FMV - $120,000 basis), and he has exchanged it for 85% of the stock of Heron Corporation and cash of $40,000. He recognizes the gain of $40,000 on the transfer.

Quiz 4: Corporations Organization and Capital Structure