Question 1

Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 in cash in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil's tax basis in the stock received in the exchange?

Accepted Answer

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

Question 2

Tristan transfers property with a tax basis of $920 and a fair market value of $1,600 to a corporation in exchange for stock with a fair market value of $920 and $426 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $254 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 equal to the sum of the tax basis of the property transferred plus any liabilities assumed by the corporation, which is $920 + $254 = $1,174. The fair market value of the stock and cash received is not relevant for determining the corporation's tax basis in the property received.

Question 3

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 of the Internal Revenue Code allows for the transfer of property to a corporation by one or more persons in exchange for stock in that corporation, without recognizing a gain or loss, as long as the transferors are in control of the corporation immediately after the exchange. This provision does not exclude any specific class of stock, such as voting common stock, voting preferred stock, or nonvoting preferred stock, from being used in the transaction.

Question 4

Amy transfers property with a tax basis of $1,590 and a fair market value of $1,080 to a corporation in exchange for stock with a fair market value of $605 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $475 on the property transferred. What is Amy's tax basis in the stock received in the exchange?

Accepted Answer

In a section 351 exchange, the transferor's tax basis in the stock received is equal to the tax basis of the property transferred, reduced by any liabilities assumed by the corporation. Therefore, Amy's tax basis in the stock received would be:

$1,590 (tax basis of property) - $475 (liability assumed by corporation) = $1,115

This means that choice B is the correct answer.

Question 5

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 6

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 7

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 8

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 equal to the sum of the fair market value of the property transferred ($900) reduced by the liability assumed by the corporation ($100), minus the fair market value of the stock received ($750), plus any cash received ($50). Therefore, the corporation's tax basis in the property received is $900 - $100 - $750 + $50 = $850.

Question 9

Ashley transfers property with a tax basis of $8,240 and a fair market value of $4,840 to a corporation in exchange for stock with a fair market value of $3,400 and $525 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $915 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

Accepted Answer

Under section 351, if a transfer of property to a corporation is in exchange solely for stock, no gain or loss will be recognized. The tax basis of the property transferred will be carried over to the stock received. In this case, Ashley transferred property with a tax basis of $8,240 and received stock with a fair market value of $3,400. However, the corporation assumed a liability of $915 on the property transferred. Thus, the total value of stock received by Ashley is $3,400 - $915 = $2,485. Therefore, Ashley's tax basis in the stock received is $8,240 - $2,485 = $5,755.

Question 10

Rachelle transfers property with a tax basis of $980 and a fair market value of $1,280 to a corporation in exchange for stock with a fair market value of $720 and $88 incash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $472 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 equal to the sum of Rachelle's tax basis in the property transferred ($980) and the amount of the liability assumed by the corporation ($472), minus any cash received ($88). Therefore, the corporation's tax basis in the property received is calculated as follows: $980 + $472 - $88 = $1,364. However, the value of the stock received ($720) cannot exceed the fair market value of the property transferred ($1,280), so the corporation's tax basis is capped at $1,068.

Question 11

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 12

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 apply when the aggregate basis of all property transferred to a corporation exceeds the aggregate fair market value of such property. In this situation, the aggregate tax basis of the property received by the corporation cannot exceed the aggregate fair market value of the property. This means that the corporation will have a lower tax basis in the property than the transferor had before the transfer, resulting in a potential built-in loss. Therefore, choice C is the correct answer. Choices A and B are incorrect because they do not consider the rule related to aggregate basis and fair market value. Choice D is incorrect because it suggests that the corporation can have a tax basis greater than the transferor's tax basis, which is not true if there is a built-in loss.

Question 13

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

Accepted Answer

Section 1244 of the Internal Revenue Code allows an individual shareholder to deduct up to $50,000 ($100,000 if filing jointly) of the loss from the sale of qualifying small business stock as an ordinary loss rather than a capital loss. This provision is specifically designed to encourage investment in small businesses by providing more favorable tax treatment for losses.

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

When property is transferred to a corporation in exchange for stock, under section 351 of the Internal Revenue Code, the transferor does not recognize any gain or loss. The transferor's tax basis in the stock received is equal to the tax basis of the property transferred, decreased by any liabilities assumed by the corporation. In this case, Amy's tax basis in the property transferred was $900, and the corporation assumed a liability of $150, so her tax basis in the stock received is $750 ($900 - $150). Therefore, the correct answer is B.

Question 15

Tristan transfers property with a tax basis of $900 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $900 and $200 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 is the transferor's adjusted basis in the property transferred ($900), plus any gain recognized by the transferor. Since the liability assumed ($100) plus cash received ($200) does not exceed the fair market value of the stock received ($900), no gain is recognized, and the basis is adjusted only by the liability assumed. Therefore, the corporation's basis in the property is the transferor's basis plus the liability assumed, totaling $1,000. However, the correct calculation should consider the fair market value adjustment, leading to a basis of $1,100, which is not directly derived from the given choices without considering the specific details of Section 351 transactions. The explanation provided might have been misleading due to an oversight in the calculation process. The correct basis should reflect the transferor's basis plus any gain recognized or adjustments for liabilities assumed, aligning with the principles of Section 351 but also taking into account the specifics of how basis adjustments are made in these transactions, which involves more detailed tax rules.

Question 16

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

This statement is incorrect because buyers generally prefer to buy assets so they can take a tax basis in the assets acquired equal to the assets' fair market value, not buy stock. The other statements are correct and describe motivations for buyers and sellers in M&A transactions.

Question 17

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. However, it does not allow for the recognition of a loss.

Question 18

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 the tax benefits of an asset acquisition, such as higher depreciation deductions and the ability to step-up the basis of the assets acquired. This election is made under section 338 of the Internal Revenue Code.

Question 19

Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

Accepted Answer

Under section 351, Ashley's transfer of property to the corporation in exchange for stock with a fair market value of $2,000 and $500 in cash qualifies for deferral of gains or losses. The tax basis of the property transferred becomes the tax basis of the stock received, which is $5,000. However, since the fair market value of the stock received is only $2,000, Ashley incurs a loss of $3,000 ($5,000 - $2,000). This loss is not recognized for tax purposes. Instead, the loss reduces the tax basis of the stock received. Thus, the tax basis of the stock received is $2,000 (fair market value) - $3,000 (loss not recognized) + $500 (cash received) = $4,000.

Question 20

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 a sole shareholder contributes capital to a corporation, the shareholder does not recognize a gain or loss on the transfer, and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred. This is because the shareholder is essentially exchanging their ownership in the property for an ownership interest in the corporation, which is not a taxable transaction. The corporation's basis in the property is also transferred at the same amount as the shareholder's basis in the property, since the corporation is essentially stepping into the shoes of the shareholder in terms of ownership and basis.

Quiz 8: Corporate Formation, Reorganization, and Liquidation