Ch. 8 - Corporate Formation, Reorganization and Liquidation

Question 1

Before gain or loss is ____ is must first be _____

Answer 1

recognized; realized

Question 2

Realization

Answer 2

generally occurs when a transaction takes places (ie. an exchange of property rights between 2 persons)

Question 3

Computing gain or loss realized in a property transaction

Answer 3

Amount realized (received)
- adjusted tax basis of the property transferred
= gain or loss realized

Question 4

Computing the amount realized in a property transaction

Answer 4

Cash received
+ FMV of other property received
+ Liabilities assumed by the transferee on the transferred property
- selling expenses incurred in the transaction
- Liabilities assumed by the transferor on any property received in the exchange
= amount realized

Question 5

Computing a property’s adjusted tax basis in a property transaction

Answer 5

Acquisition basis
+ capital improvements
- depreciation
= adjusted tax basis

Question 6

The entire amount of gain or deductible loss realized is

Answer 6

recognized unless otherwise provided by the IRC

Question 7

Gain or loss is not recognized if:

Answer 7

1. the gain or loss is excluded from gross income (will never be recognized)
2. the gain or deductible loss is deferred from gross income (recognition of the gain or deductible loss is postponed to a future period)

Question 8

Transfers of property to a corp are transactions in which

Answer 8

realized gain or loss may be deferred if certain requirements are met

Question 9

Recognition of a deferred gain or loss is

Answer 9

postponed until the property received in the exchange is subsequently disposed of (e.g. recognition of realized gain will be postponed until stock is sold)

Question 10

in the formation of a corp, or in subsequent transfers of property to an existing corp

Answer 10

shareholders transfer cash and noncash property to the corp in return for stock in the corp

Question 11

The stock can be

Answer 11

common or preferred, voting or nonvoting

Question 12

gain or loss deferred in the transfer of property is reflected

Answer 12

in the shareholder’s tax basis in the stock received in exchange for the transferred property

Question 13

A deferred gain

Answer 13

decreases the shareholder’s tax basis in the stock to an amount equal to the stock’s FMV less the gain deferred

Question 14

A deferred loss

Answer 14

increases the shareholder’s tax basis in the stock to an amount equal to the stock’s FMV plus the loss deferred

Question 15

Congress provides for the deferral of gain or loss on the transfer of property to a corp in exchange for stock

Answer 15

to remove tax consequences as an impediment to forming a corp and to provide taxpayers with flexibility in choosing their preferred form of doing business

Question 16

Congress justified tax deferral because

Answer 16

shareholders maintained an interest in the property transferred through a different form on ownership (from direct ownership to indirect ownership through stock)

Question 17

For shareholders to receive tax deferral in a transfer of property to a corp

Answer 17

the transferors must meet the requirements of IRC 351

Question 18

Section 351 applies to those transactions in which

Answer 18

one or more shareholders transfer property to a corp in exchange for stock (ie shareholders)

Question 19

The IRC defines a person for tax purposes as

Answer 19

including individuals, corporations, partnerships and fiduciaries (estates and trusts)

Question 20

The corp receiving the property in exchange for its own stock

Answer 20

is not subject to tax when it receives property

Question 21

What constitutes property for purposes of 351

Answer 21

Most assets (tangible and intangible)
Property includes money, tangible assets, and intangible assets (trademarks, logos, company names)
Services, interest owed by the corp and debt not evidenced by a security do not count as property

Question 22

a person who receives stock in return for services generally has

Answer 22

compensation equal to the FMV of the stock received

Question 23

Boot

Answer 23

the portion of the transfer relating to other property, property thrown in to equalize the exchange

Question 24

When property is transferred to a corp in exchange for stock and other property

Answer 24

only the portion of the transfer exchanged for stock will qualify for tax deferral

Question 25

The receipt of boot will cause the transferor

Answer 25

to recognize gain, but not loss, realized on the exchange

Question 26

Stock for purposes of 351 does not include

Answer 26

stock warrants, rights or options

Question 27

property transferred in exchange for debt of the corp

Answer 27

is not eligible for deferral under 351

Question 28

Control for purposes of 351 is defined as

Answer 28

the ownership of 80% or more of the total combined voting power of all voting stock that is issued and outstanding, and 80% or more of the total number of shares of each class of nonvoting stock

Question 29

Whether the control test is met is based on

Answer 29

the collective ownership of the shareholders transferring property to the corp immediately after the transfer
This group of shareholders is only composed of those who have transferred property, not services, in exchange for stock
The aggregate ownership (not the change in ownership) of these shareholders immediately after the transfer must meet the 80% threshold

Question 30

Generally when a shareholder transfers services and property in exchange for stock, that shareholder is considered to
be

Answer 30

a transferor of property for purposes of the control test

Question 31

If the primary purpose for the shareholder’s transfer of property (in addition to services) to the corp is to qualify the exchange of another person under 351, that shareholder would be considered to be

Answer 31

a transferor of property only if the value of the stock received for property is not of “relatively small value” compared to the value of the stock received for services

Question 32

The IRS has stated that for ruling purposes, property will not be of “relatively small value” if

Answer 32

it equals at least 10% of the value of the services provided

Question 33

The regulations state that stock received for property that is of “relatively small value” in comparison to the value of the stock already owned will

Answer 33

not be considered issued in return for property (ie. the shareholders making the contribution will not be included in the control test) if the “primary purpose” of the transfer is to qualify the exchanges of another person under 351

Question 34

An existing shareholder must contribute property that

Answer 34

has a FMV of at least 10% of the value of the stock already owned to be included in the control test

Question 35

Computing the tax basis of stock received in a tax-deferred section 351 transaction

Answer 35

Cash contributed
+ tax basis of other property contributed
- liabilities assumed by the corp on property contributed
= tax basis of stock received

Question 36

Substituted basis

Answer 36

The basis of the property transferred is substituted for the basis of the property received

Question 37

A shareholder who received property other than stock (boot) recognizes a _______ in an amount not to exceed ____

Answer 37

gain but not a loss;
the lesser of:
1. gain realized
2. the FMV of the boot received

Question 38

The amount of gain recognized when boot is received in a 351 transaction is determined by

Answer 38

allocating the boot received pro rata to each property using the relative FMV of the properties

Question 39

The character of gain recognized is determined by

Answer 39

the type of property to which the boot is allocated

Question 40

Boot received in a 351 transaction receives a tax basis equal to

Answer 40

its FMV

Question 41

Computing the tax basis of stock in a section 351 transaction when boot is received

Answer 41

Cash contributed
\+ tax basis of other property
\+ gain recognized on the transfer
- FMV of boot received
- Liabilities assumed by the corp on property contributed
= tax basis of stock received

Question 42

The corporations assumption of a shareholders liability attached to a property transferred is

Answer 42

not treated as boot received by the shareholder, with 2 exceptions:

1. If any of the liabilities assumed by the corp are contributed with the purpose of avoiding the federal income tax or if there is no corp business purpose for the assumption, all of the liabilities assumed are treated as boot to the shareholder
2. Even when liabilities are not treated as boot, the taxpayer is required to recognize gain to the extent the liabilities assumed by the corp exceed the aggregate tax basis of the properties transferred by the shareholder

Question 43

the avoidance method may be present where

Answer 43

the corp assumes debt created by the shareholders immediately prior to the contribution of the encumbered assets.
This transaction is essentially equivalent to having the corp pay the shareholders cash in exchange for the property

Question 44

the “no business purpose” motive can also be present where

Answer 44

shareholders have the corp assume the shareholder’s personal liabilities (grocery bills or alimony, for example)

Question 45

there is a special exemption for the assumption of liabilities the payment of which

Answer 45

would give rise to a deduction
The assumption of such liabilities is disregarded in determining if the liabilities assumed exceed basis
Ex. where a corp assumes the AP of a cash-method sole proprietorship or where a sub assumes “payment liabilities” (eg. accrued vacation pay) of an accrual-method corp

Question 46

Does the corp receiving property in exchange for its stock recognize gain or loss realized on the transfer?

Answer 46

No

Question 47

In transactions that do not qualify for 351, the corp will have

Answer 47

a FMV tax basis in the property

Question 48

In a 351 transaction, the corp will have a

Answer 48

tax basis in the property that equals the property’s tax basis in the transferors hands

Question 49

The transferred property is said to have a

Answer 49

carryover basis

Question 50

carryover basis

Answer 50

the corp carries over the shareholder’s basis in the property

Question 51

To the extent the shareholder’s tax basis carries over to the corp and the property is 1231 property or a capital asset,

Answer 51

the shareholder’s holding period also carries over (it tacks to the property). This could be important in determining if subsequent gain or loss recognized on the disposition of the property qualifies as a 1231 gain or loss or a long term capital gain or loss

Question 52

If the shareholder recognizes gain as a result of the property transfer (b/c boot is received)

Answer 52

the corp increases its tax basis in the property by the gain recognized

Question 53

computing the tax basis of property received by the corp in a section 351 transaction

Answer 53

Cash contributed by the shareholder
+ tax basis of other property contributed by the shareholder
+ gain recognized on the transfer by the shareholder
= tax basis of property received

Question 54

the tax law limits the ability of a shareholder to transfer

Answer 54

a “built-in loss” to a corp in a 351 transaction
In particular if the aggregate adjusted tax basis of property trasnferred to a corp by a shareholder in a 351 transfer exceeds the aggregate FMV of the assets, the aggregate tax basis of the assets in the hands of the transferee corp cannot exceed their aggregate FMV

Question 55

The aggregate reduction in tax basis is

Answer 55

allocated among the assets transferred in proportion to their respective built-in losses immediately before the transfer

Question 56

As an alternative, the transferor and transferee can

Answer 56

elect to have the transferor reduce her stock basis to FMV (ie. the duplicate loss is eliminated at either the corp or shareholder level)

Question 57

Depreciable assets transferred to a corp:

To the extent a property’s tax adjusted basis carried over from the shareholder

Answer 57

the corp steps into the shoes of the shareholder and continues to depreciate the carryover basis portion of the property’s tax basis using the shareholder’s depreciation schedule

Question 58

Any additional basis (from recognition of gain due to boot received) is treated as

Answer 58

a separate asset and is subject to a separate depreciation election (ie. this one physical asset is treated as two tax assets for depreciation purposes)

Question 59

Contribution to capital

Answer 59

a transfer of property to a corp by a shareholder or nonshareholder for which no stock or other property is received in return

Question 60

Contribution to capital, the corp receiving the property

Answer 60

is not taxed on the receipt of the property

Question 61

Contribution to capital, If the property is contributed by a nonshareholder (ie. a city contributes land to induce a corp to locate its operations there)

Answer 61

the corp’s tax basis in the property is zero

Question 62

a capital contribution generally is not a ______ because?

Answer 62

taxable event; the shareholder does not receive any additional consideration in return for the transfer

Question 63

A shareholder making a capital contribution gets to

Answer 63

increase the tac basis in her existing stock in an amount equal to the tax basis of the property contributed