Question 1

Similar to like-kind exchanges, the receipt of "boot" under § 351 can cause gain to be recognized.

Accepted Answer

Boot received in a § 351 transaction can trigger gain recognition to the extent of the lesser of the boot's fair value or the realized gain on the transaction.

Question 2

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

Accepted Answer

False

Question 3

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 according to the tax code § 351, which states that only property can be exchanged for stock without recognizing gain or loss. Services are not considered property, therefore the fair market value of the stock received for services must be reported as income.

Question 4

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

Accepted Answer

This is an example of a tax-free contribution to a corporation under Section 351 of the Internal Revenue Code. As long as certain requirements are met, neither Gabriella nor Maria will recognize gain on the transfer.

Question 5

One month after Sally incorporates her sole proprietorship, she gives 25% of the stock to her children.Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement.

Accepted Answer

Section 351 can still apply to Sally even though she has given 25% of the stock to her children. As long as Sally still has at least 80% control of the stock, she can qualify for tax-free treatment under Section 351.

Question 6

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, a § 351 transaction is a tax-free exchange of property for stock of a corporation. However, if the transferor receives any consideration other than stock, such as cash or other property, then that portion of the transaction may be taxable.

Question 7

A transferor who receives stock for both property and services cannot be included in the control group in determining whether an exchange meets the requirements of § 351.

Accepted Answer

According to § 351, a transferor who receives stock for both property and services can be included in the control group for determining whether an exchange meets the requirements of § 351.

Question 8

As part of a § 351 transfer, a shareholder receives boot.If a realized loss resulted, none of the boot is taxed.

Accepted Answer

The answer of As part of a § 351 transfer,...

Question 9

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 Section 351 of the Internal Revenue Code, when a transfer of appreciated property to a controlled corporation is exchanged for nonqualified preferred stock, the transferor is required to recognize gain to the extent of the fair market value of the preferred stock received.

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

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 determined by subtracting the adjusted basis of the property transferred from the fair market value of the stock received.

Question 12

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 13

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 14

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

The answer of Allen transfers marketable securities with an adjusted...

Question 15

The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.

Accepted Answer

According to § 351, the definition of property includes unrealized receivables transferred by a cash basis taxpayer.

Question 16

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

If § 351 applies, Tina would not recognize any gain or loss on the transfer of assets to the corporation. However, since the fair market value of the assets is less than their adjusted basis, Tina would have a built-in loss which may be recognized upon the subsequent sale of the assets by the corporation. This is known as a "built-in loss" and is subject to special rules under § 362(e). However, Tina herself cannot recognize a loss on the transfer.

Question 17

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 18

A secret process and patentable invention both constitute "property" under § 351.

Accepted Answer

Both a secret process and a patentable invention are considered forms of intellectual property that can be protected under § 351 of the law.

Question 19

Section 351 (which permits transfers to controlled corporations to be tax deferred) can be justified under the wherewithal to pay concept.

Accepted Answer

Section 351 allows for the tax deferral of transfers to controlled corporations because it is based on the wherewithal to pay concept. This concept recognizes that the transfer does not result in a realization of income for the transferor and therefore the transferor may not have the immediate ability to pay taxes on the transferred assets. By deferring the tax, the transferor is able to assist in the growth and development of the corporation without facing immediate tax consequences. This supports the economic growth and development of the entity and the broader economy.

Question 20

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 apply to transfers of property to a corporation even after its initial formation.

Quiz 18: Corporations: Organization and Capital Structure