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Exam 8: Corporate Formation, Reorganization, and Liquidation

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Question 21

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

A) Section 1244 allows an individual shareholder to exempt gain from sale of the stock from tax.
B) Section 1244 allows an individual shareholder to deduct all of the loss from sale of the stock as an ordinary loss in the year of the sale.
C) 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.
D) Section 1244 allows a corporate 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.

E) A) and C)
F) B) and D)

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Question 22

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The definition of property as it relates to a section 351 transaction includes money.

A) True
B) False

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Question 23

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Boston, Inc. made a capital contribution of investment property to its 100 percent-owned subsidiary, Hartford Company. The investment property had a fair market value of $1,000,000 and a tax basis to Boston of $250,000. What are the tax consequences to Boston, Inc. on the contribution of the investment property to Hartford Company and what is the tax basis of the investment property to Hartford Company after the contribution to capital?

Which statement best describes the concept of realization as it applies to gain or loss?

Don and Marie formed Paper Lilies Corporation on January 2. Don contributed cash of $400,000 in return for 50 percent of the corporation's stock. Marie contributed a building and land with the following fair market values and tax-adjusted bases in return for 50 percent of the corporation's stock. To equalize the exchange, Paper Lilies Corporation paid Marie $50,000 in addition to her stock. a. What amount of gain or loss does Marie realize on the formation of the corporation? b. What amount of gain or loss, if any, does she recognize? c. What is Marie's tax basis in the stock she receives in return for her contribution of property to the corporation? d. What adjusted basis does Paper Lilies Corporation take in the land and building received from Marie?

Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

Mandel transferred property to his new corporation in a section 351 transaction. One of the properties transferred was land with a fair market value of $200,000 and a tax basis of $250,000. In all cases, the corporation will always take a tax basis in the land of $200,000 to prevent the "built-in loss" from being transferred from Mandel to the corporation. The built-in loss rules only apply if the aggregate fair market value of the properties transferred is less than the aggregate tax basis of the properties transferred.

Control as it relates to a section 351 transaction is strictly defined to be 80 percent or more of the voting power of the stock of the corporation to which property is transferred. Control also requires ownership of 80 percent or more of each class of nonvoting stock.

Continuity of interest as it relates to a tax reorganization focuses on the aggregate equity received by the shareholders of the target corporation in the transaction. The regulations require the target shareholders to receive, in the aggregate, stock with a fair market value of at least 40 percent of the value of the property transferred in the exchange.

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

In December 2016, Jill incurred a $50,000 loss on the sale of Crown Corporation stock that she purchased in 2010. The stock satisfied all of the §1244 stock requirements at the time of issue. Jill is married to Jack and together they file a joint tax return. How much of the loss can Jack and Jill deduct in 2016, assuming they do not have capital gains in the current or prior years, and what is the character of the loss?

To meet the control test under section 351, taxpayers transferring property to a corporation must in aggregate own 80 percent or more of the corporation's voting stock and 80 percent of each class of nonvoting stock after the transfer. The group of taxpayers transferring property must in the aggregate meet the 80 percent ownership tests.

Which of the following statements best describes the recognition of loss on property transferred to shareholders in complete liquidation of a corporation?

Which of the following statements best describes the requirement that must be met in a tax-deferred Type B stock-for-stock reorganization?

Type A reorganizations involve the transfer of assets of targets corporation via a merger or consolidation.

Casey transfers property with a tax basis of $2,000 and a fair market value of $5,000 to a corporation in exchange for stock with a fair market value of $4,000 and $400 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $600 on the property transferred. Casey also incurred selling expenses of $300. What is the amount realized by Casey in the exchange?

Ken and Jim agree to go into business together selling old comic books and records. According to the agreement, Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation. Ken's tax basis in the inventory is $100,000. Jim will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures). The accounting services are valued at $50,000. Please answer the following questions about the tax consequences of the transaction to Ken. a. What amount of gain or loss does Ken realize on the formation of the corporation? b. What amount of gain or loss, if any, does he recognize? c. What is Ken's tax basis in the stock he receives in return for his contribution of property to the corporation?

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?

A liquidated corporation will always recognize loss in a complete liquidation where none of the shareholders is a corporation. The "built-in loss" rules can prevent a liquidated corporation from recognizing loss realized in a transfer of property to a noncorporate shareholder.

A section 338 transaction is a stock acquisition treated as an asset acquisition based on an election made by the acquirer.