Question 1

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 shareholder contributes capital to a corporation, the shareholder does not recognize gain or loss on the transfer. The corporation's basis in the property transferred equals the shareholder's basis in the property transferred. Therefore, choice B is correct. Choice A is incorrect because the corporation's basis in the property is not zero. Choice C is incorrect because the shareholder does not recognize gain or loss on the transfer. Choice D is incorrect because the corporation's basis in the property transferred equals the shareholder's basis, not its fair market value.

Question 2

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 as buyers generally prefer to buy assets because they can take a tax basis in the assets acquired equal to the assets' fair market value. Buying stock does not allow for a step-up in the tax basis of assets, as the basis remains the same as when the assets were originally acquired by the company.

Question 3

Which of the following statements best describes the impact of receiving boot in a section 351 transaction?

Accepted Answer

In a section 351 transaction, if boot (non-like-kind property) is received, it triggers the recognition of gain realized to the extent of the boot received, but losses are not recognized.

Question 4

Which of the following statements best describes the concept of control as it applies to a section 351 transaction?

Accepted Answer

The answer of Which of the following statements best describes...

Question 5

Which of the following statements best describes a section 338 transaction?

Accepted Answer

A section 338 transaction allows the buyer to treat a stock acquisition as an asset acquisition for tax purposes, enabling the buyer to step up the basis of the acquired company's assets.

Question 6

Which of the following statements best describes the "built-in loss" rules that apply to property transferred to a corporation under section 351?

Accepted Answer

Under section 351, if the aggregate basis of all property transferred exceeds its aggregate fair market value, the corporation's basis in the property cannot exceed the aggregate fair market value to prevent built-in losses from being recognized.

Question 7

Which of the following statements best describes the application of the continuity of enterprise principle to a Type A tax-deferred reorganization?

Accepted Answer

The continuity of enterprise principle requires that the acquiring corporation continue a significant portion of the target corporation's business in a Type A reorganization.

Question 8

Which of the following principles does not need to be satisfied for an acquisition to be a tax-deferred reorganization?

Accepted Answer

Continuity of purpose is not a requirement for an acquisition to be a tax-deferred reorganization. The other three principles mentioned - business purpose, continuity of business enterprise, and continuity of interest - must be satisfied in order for an acquisition to qualify as a tax-deferred reorganization.

Question 9

Which of the following statements best describes the continuity of interest principle as it applies to a tax-deferred acquisition?

Accepted Answer

Continuity of interest requires that shareholders in the aggregate receive at least 40 percent of the consideration in the form of equity of the acquiring company for the transaction to qualify as a tax-deferred acquisition.

Question 10

Which of the following class of stock is not allowed to be used in a section 351 transaction?

Accepted Answer

All classes of stock, including voting common stock, nonvoting preferred stock, and voting preferred stock, can be used in a section 351 transaction as long as the transaction meets the requirements of section 351 of the Internal Revenue Code.

Question 11

Which of the following statements best describes the tax results to a shareholder in a section 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 12

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 aliability 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 is the transferor's basis ($800) increased by any gain recognized by the transferor ($50 cash received + $100 liability assumed - $750 FMV of stock = $100 gain recognized), resulting in a basis of $850.

Question 13

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

Under section 351, when property is transferred to a corporation in exchange for stock, no gain or loss is recognized by the transferor. The tax basis of the stock received in the exchange is equal to the tax basis of the property transferred, increased by any gain recognized and decreased by any liabilities assumed by the corporation.

In this case, Amy transferred property with a tax basis of $900 and a fair market value of $600 to the corporation in exchange for stock with a fair market value of $450. The corporation assumed a liability of $150 on the property transferred. Therefore, Amy's tax basis in the stock received is $900 - $150 = $750.

Question 14

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 Rachelle's tax basis in the stockreceived in the exchange?

Accepted Answer

When property is transferred in a section 351 exchange, the tax basis of the stock received depends on the tax basis of the property transferred. The tax basis of the stock is determined by subtracting any liabilities assumed by the corporation from the fair market value of the property transferred. In this case, the tax basis of the property transferred is $800 and the liability assumed by the corporation is $100, resulting in a net tax basis of $700. Since the fair market value of the stock received is $750, Rachelle's tax basis in the stock is $700.

Question 15

Jamie transferred 100 percent of her stock in Fox Company to Otter Corporation in aType A merger. In exchange, she received stock in Otter with a fair market value of$400,000 plus $600,000 in cash. Jamie's tax basis in the Fox stock was $600,000. What amount of gain does Jamie recognize in the exchange and what is her basis in the Otter stock she receives?

Accepted Answer

Jamie recognizes a gain to the extent of the cash received, which is $600,000 (cash) - $600,000 (basis) = $0 gain recognized. However, the recognized gain is limited to the cash received, which is $400,000. Her basis in the Otter stock is her original basis in Fox stock ($600,000) minus the cash received ($600,000), resulting in a basis of $400,000 in Otter stock.

Question 16

Which of the following statements best describes the tax consequences of a section 338 election?

Accepted Answer

A section 338 election treats a stock purchase as an asset purchase for tax purposes, resulting in the recognition of gain or loss by the acquired corporation on the deemed sale of its assets, and the buyer receives a stepped-up basis in the assets.

Question 17

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

Accepted Answer

Section 1244 allows an individual shareholder to deduct up to $50,000 of the loss from sale of the stock as an ordinary loss in the year of the sale. This means that the shareholder can offset their ordinary income with the loss, rather than being limited to offsetting their capital gains. This can result in a larger tax savings for the shareholder. It is important to note that this benefit is only available for individual shareholders, not corporate shareholders.

Question 18

Jasmine transferred 100 percent of her stock in Woodward Company to Jefferson Corporation in a Type A merger. In exchange, she received stock in Jefferson with a fair market value of $600,000 plus $400,000 in cash. Jasmine's tax basis in the Woodward stock was $1,500,000. What amount of loss does Jasmine recognize in the exchange and what is her basis in the Jefferson stock she receives?

Accepted Answer

In a Type A merger, no loss is recognized. Jasmine's basis in the Jefferson stock is her original basis in the Woodward stock ($1,500,000) minus the cash received ($400,000), resulting in a basis of $1,100,000.

Question 19

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

Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

Question 20

Simone transferred 100 percent of her stock in Purple Company to Plum Corporation in aType A merger. In exchange, she received stock in Plum with a fair market value of$500,000 plus $500,000 in cash. Simone's tax basis in the Purple stock was $200,000. What amount of gain does Simone recognize in the exchange and what is her basis in the Plum stock she receives?

Accepted Answer

The answer of Simone transferred 100 percent of her stock...

Quiz 19: Corporate Formation, Reorganization, and Liquidation