Ch 2, 3, 4, 6 Exam Review

Question 0

What does the section 351 nonrecognition rule of gain or loss rule not apply to?

Answer 0

Exchange of services for company stock

Question 1

In section 351 what does nonrecognition of gain or loss rule only apply to?

Answer 1

Transfers of property in exchange for corporation’s stock

Question 2

3 Major requirements of section 351

Answer 2

1 property is transferred in exchange for corporation’s stock

2 property transferors must be in control of transferee corp.
Immediately after exchange

3 nonrecognition rule only applies to gain realized in exchange
Of property for stock

Question 3

What does “control” mean in section 351

Answer 3

Ownership of at least 80% of voting power and total # of shares
Of all other classes of stock

Question 4

What situation does not meet the control requirement immediately after exchange in section 351?

Answer 4

Stock disposed after exchange pursuant of prearranged plan

Question 5

In section 351 transaction, if transferor receives property other than stock, such as property considered to be boot, how is the transaction treated?

Answer 5

The transferor recognizes a gain to the extent of lesser of

FMV of any boot received or the realized gain on transaction

Question 6

Section 351 exchange: basis of stock for transferor equation

Answer 6

Transferor's Basis of Stock = 
(adjusted basis of property transferred)
\+ (gain recognized by transferor)
- (FMV of boot received)
- (liabilities assumed by transferee corporation)

Question 7

Section 351 exchange: Holding period of stock received in exchange for capital assets of section 1231 property for transferor

2) Holding period of stock received in exchange for any other property

Answer 7

Includes holding period of transferred property

2) any other property: holding period of stock received begins
Day after exchange

Question 8

2 tax consequences for transferee corporation during a section 351 exchange

Answer 8

1 corporation recognizes no gain or loss when it exchanges own
Stock for property and services
2 corporation’s holding period for property received includes
Transferor’s holding period (day after if basis is reduced to lower
FMV)

Question 9

Section 351 exchange: transferee corporation’s basis in property received?

2) exception?

Answer 9

Transferee’s basis in property received = (Transferor’s basis)
+ (gain recognized by transferor)

2) exception: if total adjusted basis of all transferred property
Exceeds total FMV of property, total basis is limited to property’s
FMV

Question 10

What is the sequencing of deduction calculations to determine taxable income for corporations? 5

Answer 10

1 all deductions other than charitable contributions, dividends
Received, NOL, US production activities
2 charitable contributions deduction
3 dividends-received deduction
4 NOL deduction
5 US production activities deduction

Question 11

Transactions between corporation and its shareholders: section 1239

Answer 11

May convert capital gain realized on sale of Depreciable
Property between corporation and controlling shareholder
Into ordinary income

Question 12

Transactions between corporation and its shareholders: section 267 deductions

Answer 12

Section 267 denies deduction for losses realized on property sales btw/Corp. and controlling shareholder

And Defers deduction for accrued expenses and interest on certain
Transactions involving a corporation and controlling shareholder

Question 13

Controlling shareholder who meets requirements for section 1239 and 267

Answer 13

Shareholder owns more than 50% in value of corp.’s stock

Question 14

Constructive stock ownership rules

Answer 14

Shareholder considered to own his own stock and stock owned
By family members (brothers, sisters, spouse, ancestors, lineal
Decendents)

And entities where shareholder has an ownership or beneficial
Interest (corp., partnerships, trusts, estates)

Question 15

Transactions between corporation and its shareholders: gains on sale or exchange transactions
What does this rule apply to? How is it treated for tax purposes?

Answer 15

If controlling shareholder sells Depreciable property to controlled
Corp. or vice versa and property is Depreciable in purchaser’s
Hands

Any gain on sale is treated as ordinary income under sec. 1239

Question 16

Transactions between corporation and its shareholders: losses on sale or exchange transactions

Answer 16

Section 267 denies deduction for losses realized on sale of
Property by controlling shareholder to corp. and vice versa

If shareholder sells property to another party at gain, seller
Recognizes gain only to extent that it exceeds disallowed loss

Should purchaser sell property at loss, previously disallowed
Loss isn’t recognized

Question 17

Section 267 defers deduction for accrued expenses or interest owed by a corporation to a controlling shareholder or vice versa. What does this provision force?

Answer 17

Forces matching of income and expense recognition by

Deferring deduction to year shareholder recognizes income

Question 18

General rule for distribution in redemption of stock

Answer 18

Generally treated as dividend

Question 19

5 stock redemption transactions that are treated as sales (capital gains)

Answer 19

1 redemptions that aren’t essentially equivalent to dividend
2 substantially disproportionate redemptions
3 complete terminations of shareholder’s interest
4 partial liquidations in redemption of noncorparate shareholder’s
Stock
5 redemptions to pay death taxes

Question 20

2 special stock redemption rules

Answer 20

1 redemptions of sec. 306 preferred stock generally taxed as
dividends to shareholder
2 sale of stock in one controlled corp. to another controlled corp.
Is treated as redemption

Question 21

What issues must be considered when unreasonable compensation is a concern? 6

Answer 21

1 size of company
2 salary history
3 salary/ bonus at comparable company
4 employee’s qualifications
5 compensation approved by board of directors
6 shareholder’s ownership interest in stock