Ester transfers land (basis of $200,000 and fair market value of $355,000) to a controlled corporation in return for stock in the corporation. However, shortly before the transfer, Ester mortgages the land and uses the $25,000 proceeds to meet personal ob
Ester has a realized gain on the transfer of $155,000 and a recognized gain of $25,000
Amt realized: $355,000 [$330,000 (value of stock adjusted for the mortgage) + $25,000 (release of liability which is treated as boot)]. Realized gain: $155,000 ($355,00
True
Section 351 deals with transfers to controlled corporations.
True
Section 351 provides that gain or loss is not recognized upon the transfer of property to a corporation when certain conditions are met.
False
Section 351 is elective if a transaction satisfies the provision's requirements.
True
Nonrecognition of gain occurs only when the shareholder receives stock.
Janice and Thom form Level Corporation. Janice transfers equipment (worth $60,000, basis of $40,000) for 50% of the stock in Level. Thom transfers inventory (worth $20,000, adjusted basis of $15,000) and provides services worth $40,000 for 50% of the stoc
Because this transaction meets the control of the corporation requirement, Janice has income of $0 and Thom has income of $
40,000 (transfer of services)
Determine the effects of � 351 for the following taxpayers.
a. Grady exchanges qualified property, basis of $12,000 and fair market value of $18,000, for 60% of the stock of Eadie Corporation. The other 40% of the stock is owned by Pedro, who acquired it
a. Because this transaction does not meet the control of the corporation requirement, Grady has income of $6,000 and $18,000 basis in his shares of stock.
b. Because this transaction meets the control of the corporation requirement, Trey has income of $0
Marie and Ethan form Roundtree Corporation with the transfer of the following. Marie performs personal services for the corporation with a fair market value of $80,000 in exchange for 400 shares of stock. Ethan contributes an installment note receivable (
Marie has income of $80,000 and $80,000 basis in her 400 shares of stock and Ethan has income of $0 and $175,000 basis in his 1,600 shares of stock.
$25,000 + $50,000 + $100,000= 175,000
Martin transfers real estate with an adjusted basis of $260,000 and fair market value of $350,000 to a newly formed corporation in exchange for 100% of the stock. The corporation assumes the liability on the transferred real estate in the amount of $300,0
Martin has a recognized gain on the transfer of $40,000 and a basis of $0 for his stock.
$300,000 liability assumed - $260,000 basis = $40,000
$260,000 basis + $40,000 gain recognized - $0 boot received - $300,000 liability assumed = $0 basis
Yvonne and Simon form Ion Corporation. Yvonne transfers equipment (basis of $110,000 and fair market value of $165,000). Simon invests $130,000 of cash. They each receive 100 shares in Ion Corporation, worth $130,000, but Yvonne also receives $35,000 in c
Ion Corporation has a basis of $145,000 in the equipment. Yvonne has a basis of $110,000 for her stock and Simon has a basis of $130,000 for his stock
$110,000 basis + recognized gain of $35,000= $145,000
$130,000 FMV + $35,000 boot received - $110,000 ba
Jocelyn contributes land with a basis of $60,000 and fair market value of $90,000 and inventory with a basis of $5,000 and fair market value of $8,000 in exchange for 100% of Zion Corporation stock. The land is subject to a $15,000 mortgage.
The exchange is tax-free under � 351 because the release of a liability
is not treated as boot under � 357(a). As a result, Jocelyn has income of $0 and a basis $50,000 in her stock.
$65,000 basis - $15,000 (liability assumed by Zion) = $50,000
True
When money or property is received in exchange for capital stock (including treasury stock), the corporation does not recognize any gain or loss.
True
Contributions by nonshareholders, such as land contributed to a corporation by a civic group or a governmental group to induce the corporation to locate in a particular community, are included in the gross income of a corporation.
False
The basis of property received by a corporation from a nonshareholder as a capital contribution is equal to the basis of the property in the hands of the shareholder, although the basis is subject to a downward adjustment when loss property is contributed
Yes, a factor
- Whether funds loaned to the corporation are used to finance initial operations or capital asset acquisitions.
- Whether holdings of debt and stock are proportionate (e.g., each shareholder owns the same percentage of debt as stock).
- Whether payment is
No, not a factor
Whether the corporation has a high ratio of current assets to current liabilities.
In a transaction qualifying under � 351, Kelcy transfers the following assets to Connor Corporation in exchange for all of its stock: equipment (basis $200,000; FMV $180,000), land (basis $65,000; FMV $80,000) and machinery (basis $100,000; FMV $95,000).
Connor Corporation has a basis of: $192,000 in the equipment, $65,000 in the land, and $98,000 in the machinery. Kelcy recognizes
no gain or loss on the transfer. Kelcy's has a basis of $365,000 for his stock.
365,000 [$200,000 + $65,000 + $100,000) (basi
If stocks and bonds are capital assets in their owner's hands, losses from their worthlessness are governed by (� 165)(g)(1). Under this provision, a capital loss materializes as of the (last day) of the taxable year in which the stocks or bonds become wo
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False
Nonbusiness bad debts are deducted as ordinary losses, while business bad debts are treated as short-term capital losses.
True
Nonbusiness bad debt treatment is limited to noncorporate taxpayers.
True
If a loan is made in some capacity that qualifies as a trade or business, nonbusiness bad debt treatment is avoided.
Several years ago, Lowell, who is single, acquired � 1244 stock in Blue Corporation at a cost of $60,000. He sells the Blue stock for $5,000 in the current year.
Lowell's sale of Blue Corporation stock produces a loss that is treated as follows:
Ordinary loss of $50,000
Capital loss of $5,000
Total loss on the sale is $55,000 ($60,000 - $5,000), the first $50,000 receives ordinary loss treatment and excess $5,000
The holder of qualified small business stock acquired after September 27, 2010 may exclude up to (100)% of any gain from the sale or exchange of such stock. (Only noncorporate) shareholders qualify for the exclusion. To qualify for the exclusion, the taxp
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a. Chaz transfers cash of $60,000 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $15,000. The income is credited to its earnings and profits account. The corporation distributes $5,000 to Chaz.
a. Chaz has a taxable dividend of $5,000 and the corporation has a deduction of $0
b. Chaz has interest of $1,800 and a note repayment of $3,000 of which $1,800 is taxable to Chaz. The corporation has a deduction of $1,800
$30,000 x 6% = $1,800
A county donates land worth $250,000 to Quarles Corporation as an inducement for Quarles to locate in the county. In addition, the city has agreed to reduce the standard real estate tax rate for Quarles by 25% on newly constructed property in the county.
The receipt of the land produces taxable income to Quarles, and the land's basis to the corporation is $250,000. In addition, the real estate tax abatement produces no taxable income to Quarles.
Alice and Jane form Osprey Corporation. Alice transfers property (basis of $25,000 and value of $200,000) for 50 shares in Osprey Corporation. Jane transfers property (basis of $50,000 and value of $165,000) and agrees to serve as manager of Osprey for on
Alice recognizes $0 gain on the transfer. Jane has income of $35,000 (value of services)
Ann and Bob form Robin Corporation. Ann transfers property worth $142,500 (basis of $49,875) for 70 shares in Robin Corporation. Bob receives 30 shares for property worth $57,000 (basis of $11,400) and for legal services (worth $5,700) in organizing the c
Ann recognizes no gain or loss of $0. Bob recognizes ordinary income of $5,700 (value of services)
Several years ago, Minjun, who is single, acquired � 1244 stock in Blue Corporation at a cost of $108,800. He sells the Blue stock for $10,880 in the current year.
Determine the amount and nature of Minjun's gain or loss recognized this year.
Minjun's sale of Blue Corporation stock produces a total loss of $97,920 of which $47,920 is treated as a capital loss.
Total loss on the sale is $108,800 - $10,880 = $97,920, the first $50,000 receives ordinary loss treatment and the excess $47,920 is tr
On January 2, Chaz transfers cash of $193,800 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $48,450. The income is credited to its earnings and profits account. The corporation distributes $14,
a. Chaz has a taxable dividend of $14,535 and the corporation has a deduction of $0
b. The corporate payment to Chaz totals $15,504. Chaz has interest of $5,814 and a note repayment of $9,690 of which $5,814 is taxable to Chaz. The corporation has a deduc
Grady exchanges qualified property, basis of $40,500 and fair market value of $48,600, for 60% of the stock of Eadie Corporation. The other 40% of the stock is owned by Pedro, who acquired it five years ago.
Calculate Grady's current income, gain, or loss
Because this transaction does not meet the control of the corporation requirement, Grady has a gain of $8,100 and $48,600 basis in his shares of stock.
$48,600 - $40,500 = $8,100
Gigi transfers real estate (basis of $60,000 and fair market value of $40,000) to Monarch Corporation in exchange for shares of � 1244 stock. Assume that the transfer qualifies under � 351.
What is the basis of the stock to Gigi? (Gigi and Monarch do not
The basis of the stock to Gigi is $60,000
$60,000 - $0 gain = $60,000
Julio sold his corporation to a competitor, Exeter LLC, for $100,000,000. Julio incorporated his business 17 years ago by investing $500,000 plus his proprietary know-how. There have been no other corporate shareholders.
Compute Julio's after-tax cash flo
Julio's after-tax cash flow from the sale is $78,699,000
Realized gain: $100,000,000 - $500,000 = $99,500,000
� 1202 exclusion: $10 mil (greater of $10 mil or $5 mil ($500,000 � 10)
LTCG: $89,500,000 (99,500,000 - 10,000,000)
After-tax cash flow: $78,699,
Jocelyn contributes land with a basis of $53,000 and fair market value of $79,500 and inventory with a basis of $19,600 and fair market value of $29,400 in exchange for 100% of Zion Corporation stock. The land is subject to a $13,250 mortgage.
Determine J
The exchange is tax-free under � 351 because the release of a liability
is not treated as boot under � 357(a). As a result, Jocelyn has income of $0 and a basis $59,350 in her stock.
$53,000 + $19,600 = $72,600
$72,600 (basis of property) - $13,250 = $59,
Chapter 18 Problems
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