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Exam 18: Corporations: Organization and Capital Structure

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Question 51

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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

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Question 52

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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

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Question 53

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Even if boot is generated under § 357(b) (i.e., the liability is not supported by a bona fide business purpose), the transferor shareholder may not have to recognize gain.

What is the rationale underlying the tax deferral treatment available under § 351?

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

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.

Nick exchanges property (basis of $100,000; fair market value of $3 million), for 65% of the stock of Yellow Corporation. The other 35% of the stock is owned by Gloria who acquired it several years ago. What are the tax consequences to Nick?

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation, Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

A shareholder's holding period for stock received under § 351 includes the holding period of the property transferred to the corporation.

Leonard transfers equipment (basis of $40,000 and fair market value of $100,000) for additional stock in Green Corporation. After the transfer, Leonard owns 90% of the stock. Leonard had claimed depreciation of $50,000 on the equipment prior to transferring it to Green Corporation. With respect to the transfer:

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.

Dick, a cash basis taxpayer, incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation. With respect to this transaction:

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.