Chapter 18 - Test Bank PDF

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CHAPTER 18 Corporations: Organization and Capital Structure 2245. Section 351 (which permits transfers to controlled corporations to be tax deferred) can be justified under the wherewithal to pay concept. *a. True b. False 2246. Similar to like-kind exchanges, the receipt of “boot” under § 351 can cause loss to be recognized. a. True *b. False

2247. 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. a. True *b. False 2248. 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. a. True *b. False 2249. In a § 351 transfer, the receipt of boot is not taxed if the shareholder has a realized loss. *a. True b. False 2250. In a § 351 transfer, gain will be recognized to the extent of the lesser of realized gain or the boot received. *a. True b. False 2251. 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. *a. True b. False 2252. The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer. *a. True b. False

CHAPTER 18 Corporations: Organization and Capital Structure 2253. 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. a. True *b. False 2254. A secret process and patentable invention both constitute “property” for purposes of § 351. *a. True b. False

2255. Since services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services. *a. True b. False 2256. The receipt of securities (i.e., long-term debt) in exchange for the transfer of appreciated property to a controlled corporation results in recognition of realized gain to the transferor. *a. True b. False 2257. In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable. *a. True b. False 2258. 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. *a. True b. False 2259. Jill transfers property worth $200,000 (basis of $190,000) to Blue Corporation. In return, she receives 80% of the stock in Blue Corporation (fair market value of $180,000) and a long-term note, executed by Blue and made payable to Jill (fair market value of $20,000). Jill recognizes gain of $20,000 on the transfer. a. True *b. False 2260. Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land (fair market value of $20,000) for 20 shares; and Ron, cattle (fair market value of $9,000) for 9 shares and services (fair market value of $21,000) for 21 shares. Section 351 will not apply in this situation because the control requirement has not been satisfied.

CHAPTER 18 Corporations: Organization and Capital Structure a. True *b. False

2261. In order to retain the services of Bonnie, a key employee in Ralph’s sole proprietorship, Ralph contracts with Bonnie to make her a 25% owner. Ralph incorporates the business receiving in return 100% of the stock. Three days later, Ralph transfers 25% of the stock to Bonnie. Under these circumstances, § 351 will not apply to the incorporation of Ralph’s business. *a. True b. False

2262. 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. a. True *b. False 2263. 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. a. True *b. False 2264. The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well. *a. True b. False 2265. The bona fide business requirement of § 357(b) is easily satisfied as long as the liability arose in the normal course of conducting the business that is incorporated. *a. True b. False

2266. When incorporating her sole proprietorship, Samantha transfers all of its assets and liabilities. Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure. Under these circumstances, the entire $30,000 will be treated as boot. *a. True b. False 2267. In determining whether § 357(c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation. *a. True b. False

CHAPTER 18 Corporations: Organization and Capital Structure 2268. A taxpayer transfers assets and liabilities to a corporation in return for its stock. If the liabilities exceed the basis of the assets transferred, the taxpayer will recognize gain to avoid having a negative basis in the stock. *a. True b. False

2269. If both §§ 357(b) and (c) apply to the same transfer (i.e., the liability is not supported by a bona fide business purpose and also exceeds the basis of the properties transferred), § 357(c) predominates. a. True *b. False 2270. When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351, the transferor shareholder’s basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property. a. True *b. False

2271. In a § 351 transaction, Gerald transfers equipment worth $85,000 (basis of $120,000) in exchange for all of the Rust Corporation stock. Gerald’s stock basis is $120,000 and Rust’s basis in the equipment is $120,000. a. True *b. False 2272. Carl and Ben form Eagle Corporation. Carl transfers cash of $50,000 for 50 shares of stock of Eagle. Ben transfers a secret process with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Eagle. Carl will have a tax basis of $50,000 in his stock in Eagle Corporation, but Ben’s basis in his stock will be zero. *a. True b. False

2273. Isabella and Marta form Pine Corporation. Isabella transfers land (basis of $40,000 and fair market value of $180,000) for 50 shares plus $20,000 cash, while Marta transfers $160,000 cash for the other 50 shares in Pine Corporation. Pine Corporation has a basis of $40,000 in the land it receives from Isabella. a. True *b. False 2274. Carmen and Carlos form White Corporation. Carmen transfers cash of $100,000 for 100 shares in White. Carlos transfers property (basis of $20,000 and fair market value of $80,000) and agrees to serve as manager of White Corporation for one year; in return, Carlos receives 100 shares in White. The value of Carlos’s services is $20,000. White Corporation can deduct $20,000 as compensation expense for the value of the services Carlos will render.

CHAPTER 18 Corporations: Organization and Capital Structure *a. True b. False

2275. Kim, a real estate dealer, and others form Eagle Corporation under § 351. Kim contributes inventory (land held for resale) in return for Eagle stock. The holding period for the stock includes the holding period of the inventory. a. True *b. False 2276. A corporation’s holding period for property received under § 351 includes the holding period of the transferor shareholder. *a. True b. False 2277. A shareholder’s holding period for stock received under § 351 includes the holding period of the property transferred to the corporation. *a. True b. False

2278. When depreciable property is transferred to a controlled corporation under § 351, any recapture potential disappears and does not carry over to the corporation. a. True *b. False 2279. In order to encourage the development of an industrial park, a county donates land to Ecru Corporation. The donation does not result in gross income to Ecru. *a. True b. False 2280. Silver Corporation receives $1 million in cash from Madison County as an inducement to expand its operations. Within one year, Silver spends $1.5 million to enlarge its existing plant. Silver Corporation’s basis in the expansion is $500,000. *a. True b. False 2281. To ease a liquidity problem, all of the shareholders of Osprey Corporation contribute additional cash to its capital. Osprey has no tax consequences from the contribution. *a. True b. False

CHAPTER 18 Corporations: Organization and Capital Structure 2282. Rosa, the sole shareholder of Robin Corporation, contributes land (basis of $40,000 and fair market value of $100,000) to the corporation but does not receive additional stock. Neither Rosa nor Robin Corporation will have to recognize gain as a result of this transfer. *a. True b. False 2283. If a corporation is thinly capitalized, all debt is reclassified as equity. a. True *b. False 2284. To help avoid the thin capitalization problem, it is advisable to make the repayment of the debt contingent upon the corporation’s earnings. a. True *b. False 2285. A shareholder lends money to his corporation in his capacity as an investor. If the loans become worthless, a business bad debt results. a. True *b. False

2286. Amy owns 20% of the stock of Wren Corporation, which she acquired several years ago at a cost of $10,000. Amy is Vice-President of Wren and earns a salary of $80,000 annually. Last year, Wren Corporation was experiencing financial problems, and Amy loaned the corporation $25,000. In the current year, Wren becomes bankrupt, and both her stock investment and the loan become worthless. Amy has a nonbusiness bad debt deduction this year of $25,000. a. True *b. False 2287. If a shareholder owns stock received as a gift from her mother, it cannot be § 1244 stock. *a. True b. False 2288. Jane and Walt form Orange Corporation. Jane transfers equipment worth $475,000 (basis of $100,000) and cash of $25,000 to Orange Corporation for 50% of its stock. Walt transfers a building and land worth $525,000 (basis of $200,000) for 50% of Orange’s stock and $25,000 cash. a. Jane recognizes a gain of $375,000; Walt recognizes a gain of $325,000. b. Jane recognizes a gain of $25,000; Walt recognizes no gain. c. Neither Jane nor Walt recognizes gain. *d. Jane recognizes no gain; Walt recognizes a gain of $25,000. e. None of the above.

CHAPTER 18 Corporations: Organization and Capital Structure 2289. Eve transfers property (basis of $120,000 and fair market value of $400,000) to Green Corporation for 80% of its stock (worth $350,000) and a long-term note (worth $50,000), executed by Green Corporation and made payable to Eve. As a result of the transfer: a. Eve recognizes no gain. b. Eve recognizes a gain of $230,000. c. Eve recognizes a gain of $280,000. *d. Eve recognizes a gain of $50,000. e. None of the above.

2290. Ann, Irene, and Bob incorporate their respective businesses and form Dove Corporation. Ann exchanges her property (basis of $100,000 and fair market value of $400,000) for 200 shares in Dove Corporation on March 1, 2009. Irene exchanges her property (basis of $140,000 and fair market value of $600,000) for 300 shares in Dove Corporation on April 11, 2009. Bob transfers his property (basis of $250,000 and fair market value of $1,000,000) for 500 shares in Dove Corporation on May 15, 2011. Bob’s transfer is not part of a prearranged plan with Ann and Irene to incorporate their businesses. What gain, if any, will Bob recognize on the transfer? a. $1,000,000. *b. $750,000. c. $250,000. d. $0. e. None of the above.

2291. Tom and George form Swan Corporation with the following investments: Tom transfers machinery worth $100,000 (basis of $40,000), while George transfers land worth $90,000 (basis of $20,000) and services rendered in organizing the corporation worth $10,000. Each is issued 25 shares in Swan Corporation. With respect to the transfers: a. Tom has no recognized gain; George recognizes gain/income of $80,000. b. Neither Tom nor George recognizes gain or income. c. Swan Corporation has a basis of $30,000 in the land. *d. George has a basis of $30,000 in the shares of Swan Corporation. e. None of the above. 2292. Ann transferred land worth $200,000, with a tax basis of $40,000, to Brown Corporation, an existing entity, for 100 shares of its stock. Brown Corporation has two other shareholders, Bill and Bob, each of whom holds 100 shares. With respect to the transfer: a. Ann has no recognized gain. b. Brown Corporation has a basis of $160,000 in the land. *c. Ann has a basis of $200,000 in her 100 shares in Brown Corporation. d. Ann has a basis of $40,000 in her 100 shares in Brown Corporation. e. None of the above. 2293. Kevin and Nicole form Indigo Corporation with the following transfers: inventory from Kevin (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo. The corporation’s stock is distributed equally to Kevin and Nicole. As a result of these transfers:

CHAPTER 18 Corporations: Organization and Capital Structure a. Indigo can deduct $25,000 as a business expense. b. Nicole has a recognized gain of $55,000 on the transfer of the real estate. *c. Indigo has a basis of $360,000 in the inventory. d. Indigo has a basis of $375,000 in the real estate. e. None of the above.

2294. Tara incorporates her sole proprietorship, transferring it to newly formed Black Corporation. The assets transferred have an adjusted basis of $240,000 and a fair market value of $300,000. Also transferred was $10,000 in liabilities, $1,000 of which was personal and the balance of $9,000 being business related. In return for these transfers, Tara receives all of the stock in Black Corporation. a. Black Corporation has a basis of $241,000 in the property. b. Black Corporation has a basis of $240,000 in the property. c. Tara’s basis in the Black Corporation stock is $241,000. d. Tara’s basis in the Black Corporation stock is $249,000. *e. None of the above. 2295. Tim, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Wren Corporation.

Cash Building Mortgage payable (secured by the building and held for 15 years)

Adjusted Basis $ 20,000 110,000

Fair Market Value $ 20,000 160,000

135,000

135,000

With respect to this transaction: a. Wren Corporation’s basis in the building is $110,000. b. Tim has no recognized gain. c. Tim has a recognized gain of $25,000. *d. Tim has a recognized gain of $5,000. e. None of the above. 2296. Mary transfers a building (adjusted basis of $15,000 and fair market value of $90,000) to White Corporation. In return, Mary receives 80% of White Corporation’s stock (worth $65,000) and an automobile (fair market value of $5,000). In addition, there is an outstanding mortgage of $20,000 (taken out 15 years ago) on the building, which White Corporation assumes. With respect to this transaction: *a. Mary’s recognized gain is $10,000. b. Mary’s recognized gain is $5,000. c. Mary has no recognized gain. d. White Corporation’s basis in the building is $15,000. e. None of the above.

2297. Kim owns 100% of the stock of Cardinal Corporation. In the current year Kim transfers an installment obligation, tax basis of $30,000 and fair market value of $200,000, for additional stock in Cardinal worth $200,000.

CHAPTER 18 Corporations: Organization and Capital Structure *a. Kim recognizes no taxable gain on the transfer. b. Kim has a taxable gain of $170,000. c. Kim has a taxable gain of $180,000. d. Kim has a basis of $200,000 in the additional stock she received in Cardinal Corporation. e. None of the above.

2298. Sarah and Emily form Red Corporation with the following investments: Sarah transfers computers worth $200,000 (basis of $80,000), while Emily transfers real estate worth $180,000 (basis of $40,000) and services (worth $20,000) rendered in organizing the corporation. Each is issued 600 shares in Red Corporation. With respect to the transfers: a. Sarah has no recognized gain; Emily recognizes income/gain of $160,000. b. Neither Sarah nor Emily recognizes gain or income. c. Red Corporation has a basis of $60,000 in the real estate. *d. Emily has a basis of $60,000 in the shares of Red Corporation. e. None of the above. 2299. Wade and Paul form Swan Corporation with the following investments. Wade transfers machinery (basis of $40,000 and fair market value of $100,000), while Paul transfers land (basis of $20,000 and fair market value of $90,000) and services rendered (worth $10,000) in organizing the corporation. Each is issued 25 shares in Swan Corporation. With respect to the transfers: a. Wade has no recognized gain; Paul recognizes income/gain of $80,000. b. Neither Wade nor Paul has recognized gain or income on the transfers. c. Swan Corporation has a basis of $30,000 in the land transferred by Paul. *d. Paul has a basis of $30,000 in the 25 shares he acquires in Swan Corporation. e. None of the above.

2300. Rick transferred the following assets and liabilities to Warbler Corporation.

Building Equipment Trucks Mortgage (held for four years) on building

Adjusted Basis

Fair Market Value

$210,000 45,000 15,000 30,000

$225,000 75,000 30,000 30,000

In return, Rick received $75,000 in cash plus 90% of Warbler Corporation’s only class of stock outstanding (fair market value of $225,000). *a. Rick has a recognized gain of $60,000. b. Rick has a recognized gain of $75,000. c. Rick’s basis in the stock of Warbler Corporation is $270,000. d. Warbler Corporation has the same basis in the assets received as Rick does in the stock. e. None of the above. 2301. Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $55,000; land by Tony (basis of $35,000 and fair market value of $45,000). Dove Corporation

CHAPTER 18 Corporations: Organization and Capital Structure issues 200 shares of stock, 100 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000. a. Section 351 cannot apply since Sarah should have received 110 shares instead of only 100. b. As a result of the transfer, Tony recognizes a gain of $10,000. c. Tony’s basis in the stock of Dove Corporation is $50,000. *d. Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred. e. None of the above. 2302. Hunter and Warren form Tan Corporation. Hunter transfers equipment (basis of $210,000 and fair market value of $180,000) while Warren transfers land (basis of $15,000 and fair market value of $150,000) and $30,000 of cash. Each receives 50% of Tan’s stock. As a result of these transfers: a. Hunter has a recognized loss of $30,000; Warren has a recognized gain of $135,000. *b. Neither Hunter nor Warren has any recognized gain or loss. c. Hunter has no recognized loss; Warren has a recognized gain of $30,000. d. Tan Corporation has a basis in the land of $45,000. e. None of the above. 2303. Erica transfers land worth $500,000, basis of $100,000, to a newly formed corporation, Robin Corporation, for all of Robin’s stock, worth $300,000, and a 10-year note. The note was executed by Robin and made payable to Erica in the amount of $200,000. As a result of the transfer: a. Erica does not recognize gain. b. Erica recognizes gain of $400,000. c. Robin Corporation has a basis of $100,000 in the land. *d. Robin Corporation has a basis of $300,000 in the land. e. None of the above. 2304. Kathleen transferred the following assets to Mockingbird Corporation.

Cash Equipment Land

Adjust...