Question 1

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. Rather, the recognized gain is determined by subtracting the adjusted basis of the property transferred from the fair market value of the stock received.

Question 2

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

Transferring shares to a related party, like a child, can trigger a tax event on the original transfer of appreciated property to the corporation. This is known as the related-party rule and is designed to prevent taxpayers from avoiding taxes by transferring appreciated property to a corporation and then transferring shares to a related party to avoid recognizing the gains.

Question 3

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 cash and property can be contributed to a corporation without recognizing gain if the transfer is in exchange for stock and the transferor has control of the corporation immediately after the exchange. In this scenario, both Gabriella and Maria receive equal shares of stock, and neither will recognize gain on their respective transfers.

Question 4

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, the receipt of nonqualified preferred stock in exchange for appreciated property does not result in recognition of gain to the transferor only if the transferor owns at least 80% of the voting power and value of the controlled corporation immediately after the exchange. If the transferor owns less than 80%, then gain recognition is required.

Question 5

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 6

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 later transfers such as mergers, consolidations, reorganizations, and transfers of property to controlled corporations.

Question 7

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

Accepted Answer

The wherewithal to pay concept refers to the ability of a taxpayer to pay taxes without having to sell assets. Both the like-kind exchange provision and § 351 allow taxpayers to defer paying taxes on certain transactions, which can help preserve their ability to pay taxes in the future. Therefore, both provisions can be justified under the wherewithal to pay concept.

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

The definition of "property" is important in determining whether taxpayers can qualify for tax deferral treatment of § 351. Only taxpayers who transfer property can avail of this benefit.

Question 9

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, no gain is recognized by the transferor. The transferor is only taxed on the installment payments received in the future.

Question 10

Similar to like­kind 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 11

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 12

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 13

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

Accepted Answer

According to § 351 of the Internal Revenue Code, if a transferor receives consideration other than stock, such as cash or property, the transaction may result in taxable gain for the transferor.

Question 14

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

Accepted Answer

This is true because § 351 of the Internal Revenue Code allows for the tax-free transfer of property to a corporation in exchange for stock. Any loss on the transfer is disallowed and the taxpayer's basis in the stock received is equal to the basis in the property transferred.

Question 15

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 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

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 statement is true. Services are not considered property for the purposes of § 351, and therefore any stock received in exchange for such services must be reported as income at its fair market value.

Question 18

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's capital gain on the transfer is calculated as the fair market value of the securities ($300,000) minus their adjusted basis ($120,000), which equals $180,000. He is only receiving 85% of the stock of Heron Corporation, so his share of the company is worth $85% of its total value, which we don't know. However, he also receives $40,000 in cash, which is unrelated to the capital gain on the transfer. Therefore, Allen recognizes a capital gain of $40,000 on the transfer, as stated in the question.

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 accurately describes the control requirement under § 351 of the Internal Revenue Code. The transferors must own at least 80% of the voting power and total number of shares in the corporation immediately after the transfer for the transaction to qualify for tax-free treatment.

Question 20

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, boot is considered a gain to the shareholder and will be taxed as such. In this scenario, the shareholder only received $10,000 in boot but had a $3,000 loss, resulting in a net gain of $7,000. Therefore, the entire $10,000 of boot will be taxed to the shareholder, not just $7,000.

Quiz 4: Corporations: Organization and Capital Structure

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

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.

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.

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.

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.

The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

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

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.

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.

Similar to likekind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

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.

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

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

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

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.

Because services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

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.

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.

Quiz 4: Corporations: Organization and Capital Structure

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

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.

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.

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.

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.

The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

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

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.

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.

Similar to like­kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

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.

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

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

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

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.

Because services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

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.

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.

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

Similar to likekind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.