Question 1

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 "boot" received, which in this case is the $20,000 long-term note. The transfer of property to a corporation in exchange for its stock can qualify for non-recognition of gain under Section 351 of the Internal Revenue Code, but only if the transferor receives solely stock of the corporation in return. Here, because Ruth received something other than stock (the note), she must recognize gain to the extent of the value of the note.

Question 2

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

Accepted Answer

When property is transferred in a transaction subject to § 351, the transferor receives stock or securities in exchange, not cash. Therefore, any loss recognized would be a only a paper loss and would not be deductible.

Question 3

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

According to the Internal Revenue Code § 351, the transfer of property to a corporation in exchange for stock does not result in recognition of gain or loss. Therefore, the transfer of an installment obligation in a transaction qualifying under § 351 should not trigger recognition of gain by the transferor.

Question 4

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 apply to transfers of property to a corporation after its initial formation, as long as certain requirements are met.

Question 5

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. Instead, it is equal to the excess of the fair market value of the property transferred over the adjusted basis of the property transferred.

Question 6

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 tax code, when a transferor receives nonqualified preferred stock in exchange for appreciated property transfer to a controlled corporation, they must recognize gain on the transaction.

Question 7

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 transferred marketable securities for 85% of the stock of Heron Corporation and received cash, resulting in a capital gain of $40,000.

Question 8

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

This statement is true. To qualify for tax deferral treatment under § 351, the transfer must involve the exchange of property for stock. If consideration other than property is exchanged, such as services or a promise to perform services in the future, the transaction will not qualify for § 351 treatment.

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

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 apply to the incorporation of Ted's business.

Accepted Answer

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

Question 11

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 (not just services) to the corporation, as long as the property transfer meets certain requirements under tax laws.

Question 12

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

According to § 351, no gain or loss is recognized if property is transferred to a corporation solely in exchange for stock. Therefore, Tina would not be able to recognize her realized loss of $10,000.

Question 13

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" does not cause loss to be recognized; it can only trigger the recognition of gain if the amount of boot received exceeds the taxpayer's basis in the property transferred.

Question 14

Sofia 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

Transferring shares to a related party such as a family member could trigger the recognition of gain on the original appreciated property transferred to form the corporation. This is known as a "related party transaction" and the IRS has specific rules and regulations regarding such transactions.

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, in a § 351 transaction, the transferor must receive only stock or securities of the transferee corporation in exchange for the transfer of property. If the transferor receives other forms of consideration, such as cash, the transaction may be taxable.

Question 16

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 received ($10,000 in this case) is taxable, not just the net after the unrecognized loss.

Question 17

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 Gabriella and Maria will not recognize gain on the transfer since the transfers fall under non-recognition provisions (specifically, Section 351 of the Internal Revenue Code) which allow for tax-free transfers of property to newly formed corporations in exchange for stocks issued by the corporation. The fair market value of the proprietary formula transferred by Maria will serve as her basis in the Luster Corporation stock she received.

Question 18

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

Accepted Answer

The wherewithal to pay concept allows taxpayers to defer taxation on a transaction until they have the cash or other assets to pay the tax liability. Just like in a like-kind exchange, where the taxation is deferred until the sale of the replacement property, § 351 allows for the deferral of taxation on the transfer of property to a corporation in exchange for stock. Therefore, § 351 can be justified under the wherewithal to pay concept.

Question 19

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 statement is true. The 80% ownership requirement under § 351 is commonly referred to as the "control requirement."

Question 20

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 is true. Section 351 of the Internal Revenue Code only applies to the transfer of property to a corporation in exchange for stock. Services, which are not considered property, do not qualify for tax-free treatment under this section. Therefore, the fair market value of the stock received in exchange for services must be reported as income.

Quiz 4: Corporations: Organization and Capital Structure