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Exam 18: Corporations: Organization and Capital Structure

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Question 51

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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

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Question 52

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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

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Question 53

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Four individuals form Chickadee Corporation under § 351.Two of these individuals,Jane and Walt,made the following contributions: Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

Kathleen transferred the following assets to Mockingbird Corporation. In exchange,Kathleen received 40% of Mockingbird Corporation's only class of stock outstanding.The stock has no established value.However,all parties sincerely believe that the value of the stock Kathleen received is the equivalent of the value of the assets she transferred.The only other shareholder,Rick,formed Mockingbird Corporation five years ago.

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 corporation's holding period for property received under § 351 includes the holding period of the transferor shareholder.

Section 351 (which permits transfers to controlled corporations to be tax deferred)can be justified under the wherewithal to pay concept.

When depreciable property is transferred to a controlled corporation under § 351,any recapture potential disappears and does not carry over to the corporation.

Shawn transfers property (basis of $40,000 and fair market value of $35,000) to Condor Corporation in exchange for § 1244 stock.The transfer qualifies as a nontaxable exchange under § 351; therefore,Shawn's basis in the Condor stock is $40,000.Five years later,Shawn sells the Condor stock for $25,000.With respect to the sale,Shawn has:

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.

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.

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.

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