Chapter 18 Flashcards
When a taxpayer’s economic status has not changed and the wherewithal to pay is lacking, the Code provides special exceptions to the requirement that realized gain or loss be recognized. One such exception pertains to like-kind exchanges. When a taxpayer exchanges property for other property of a like kind, § ___ provides that gain or loss on the exchange is not recognized because a ____ in the taxpayer’s investment has not occurred.
1031
substantive change
§____ provides that gain or loss is not recognized upon the transfer of property to a corporation when certain conditions are met.
This provision also reflects the principle that gain should not be recognized when a taxpayer’s investment has not _____.
351
substantively changed
If the taxpayer receives property other than stock (i.e., cash or other “boot” from the corporation, realized gain is ____.
recognized
With both sections 1031 and 351, gain or loss is ____ until a substantive change in the taxpayer’s investment occurs.
postponed
In a like-kind exchange, the recognition of gain is avoided only to the extent the taxpayer receives _____.
However, the taxpayer must recognize some or all of the ____ when received boot.
like-kind property
realized gain
What is the formula to calculate realized gain on a like-kind exchange?
FMV (rec’d)
AB (transferred)
Real G/L
If a taxpayer transfers property to a corporation and receives cash or property other than stock, gain (but not loss) is recognized to the extent of the lesser of the ___ or the ____.
Any gain recognized is classified according to the type of assets transferred.
realized gain or
boot received
§ 351 is ____ if a transaction satisfies the provision’s requirements: (3)
mandatory 1) property is transferred 2) in exchange for stock and 3) the property transferors are in control of the corporation after the exchange.
If recognition of gain or loss is desired, the taxpayer must plan to ____ at least of the requirements for §351.
fail to meet
Property for purposes of § 351 is any property except for ____.
services
A taxpayer must report as income the fair market value of any ____ received as compensation for ____ rendered.
consideration
services
If you receive stock as compensation for services, the value of the services you provide is equal to the value of the ____.
stock received
Nonrecognition of gain occurs only when the ____ receives stock. Stock for this purpose includes ____ and most ____.
It does not include:
shareholder
common
preferred
non qualified preferred stock
stock rights and stock warrants
corporate debt or securities
Control means that the person or persons transferring the property must have at least an __ percent stock ownership in the corporation.
The property transferors must own stock possessing at least __ percent of the total combined ____ of all classes of stock entitled to vote and at least __ percent of the total ____ of all other classes of stock.
80
voting power
number of shares
Immediately after the exchange, the property transferors must ____ the corporation.
control
Control can apply to ____ or ____ if they are all parties to an integrated transaction.
> 1 - doesn’t require simultaneous exchanges
one person
to several taxpayers
Once control is achieved, it is not necessarily lost if, shortly after the transaction, stock received by shareholders is sold or given to person who are not parties to the exchange. You can still qualify as long as ____.
if one person messes it up it messes it up for everyone
there was no predetermined plan for the ultimate disposition of the stock in place before the exchange
A person who receives stock in exchange for services and for property transferred may be treated as a ____ for purposes of the control test.
When this is the case, the person is taxed on the value of the stock issued for _____ but not for ____, assuming the property transferors control the corporation.
In this case, all stock received by the person transferring both property and services is counted in determining whether the transferors acquired control of the corporation.
member of the transferring group
services not for property
To be a member of the group and to aid in qualifying all transferors under the 80 percent control test, the person contributing services must transfer property having more than a ____ compared to services performed.
i.e. 10% of FMV of services provided
If the value of the property transferred is less than this amount, the IRS will not issue an advance ruling that the exchange meets the requirements of § 351.
relatively small or nominal
Once a corporation is in operation, §351 also applies to any later transfers of property for stock by either ___ or ___ shareholders.
new
existing
Generally, when liabilities are assumed by another party, the party who is relieved of the debt is treated as having received ___ or ____.
§___ _ provides, however, that when the acquiring corporation assumes a liability in a §351 transaction, the liability is not treated as ___ received for gain recognition purposes.
Nevertheless, liabilities assumed by the transferee corporation are treated as ___ in determining the basis of the stock received by the shareholder. The basis of the stock received is reduced by the amount of the ___ assumed by the corporation.
cash or boot §357a boot boot liabilities
The general rule of §357a has two exceptions:
357b and c
An exception to §357a which provides that if the principal purpose of the assumption of the liabilities is to avoid tax or if there is no bona fide business purpose behind the exchange, the liabilities are treated as boot
357b
An exception to §357a that provides that if the sum of the liabilities exceeds the adjusted basis of the properties transferred, the excess is taxable gain.
357c
With §357b, if it’s not related to acquiring property, it is a ____.
tainted liability
Section 357 _ trumps section 357 _.
b
c
Formula to find the basis in the stock that the stockholder received
Basis in the properties transferred \+ gain recognized - boot received - liability assumed = basis in the stock received
§__ _ postpones gain or loss until the transferor-shareholder disposes of the stock in a taxable transaction. The postponement of the shareholder gain or loss has a corollary effect on the basis of the stock received by the shareholder and the basis of the property received by the corporation. This procedure ensures that any gain or loss under §__ ultimately will be recognized when the affected asset is disposed of in a ____ ____.
351a
351
taxable transaction
Basis of Stock to Shareholder
For a taxpayer transferring property to a corporation in a §351 transaction, the stock received in the transaction is given a ____.
substituted basis
Basis of Stock to Shareholder
The stock received in a §351 transaction has a basis the same as the basis of ____, increased by any ____ on the exchange of property and decreased by ____ received.
the property transferred by the taxpayer.
gain recognized
boot
Basis of Property to Corporation
The basis or property received by the corporation generally is determined under a ____ basis rule, which provides that the property’s basis to the corporation is equal to the ____, increased by the amount of ____ on the transfer by the transferor-shareholder.
carryover
transferor’s basis
gain recognized
A transfer of stock for services is not a ___ to a corporation;
taxable transaction
Can a corporation deduct as a business expense the fair market value of the stock it issues in consideration of services?
Yes unless the services are such that the payment is characterized as a capital expenditure. (not organizational costs or start-up expenditures)
In a§351 transfer, the shareholder’s holding period for stock received in exchange for a capital asset or §1231 property includes ____.
the holding period of the property transferred to the corporation.
The holding period of the property is “tacked on” to the holding period of the stock.
The holding period for stock received for any other property (e.g. inventory) begins on ____.
the day after the exchange
The corporation’s holding period for property
acquired in a §351 transfer is the holding period of the transferor-shareholder regardless of the ____.
character of the property in the transferor’s hands
In a §351 transfer where no gain is recognized, the depreciation recapture rules do not apply. However, any recapture potential associated with the property carries over to the corporation.
.
The basis of property received by a corporation from a shareholder as a ____ is equal to the basis of the property in the hands of the shareholder, although the basis is subject to a downward adjustment when loss property is contributed.
capital contribution
The basis of property transferred to a corporation by a non shareholder as a contribution to capital is ___.
zero
If a corporation receives money as a contribution to capital from a non shareholder, a special rule applies. The basis of any property acquired with the money during a 12 month period beginning on the day the contribution was received is ___.
The excess of money received over the cost of the new property reduces the basis of other property held by the corporation and is applied in the following order:
reduced by the amount of the contribution Depreciable property Property subject to amortization Property subject to depletion All other remaining properties
Formula for the basis of property received by a corporation from a shareholder:
transferor’s AB
+ any gain recognized
decreased if built in loss property
If you receive cash as a contribution to capital and use it to buy property within a year, the basis of the property is:
Cost
- cash received
If stocks and bonds are capital assets in their owner’s hands, losses from their worthlessness are governed by §___.
165(g)(1)
Under §165(g)(1), a capital loss materializes as of the ____ in which the stocks of bonds become worthless.
No deduction is allowed for ____.
last day of the taxable year
a mere decline in value
The ____ is disallowed if the sale or exchange is to a related party as defined under §267(b). (e.g. parents and children are related, but aunts, uncles, and cousins are not)
investor loss
When the stocks or bonds are not capital assets, worthlessness yields ___.
an ordinary loss
In addition to worthlessness of stocks and bonds, the financial demise of a corporation can result in bad debt deductions to those who have extended credit to the corporation. These deductions can be either ___ or ___.
business or nonbusiness bad debts
The distinction between the two types of deductions is important for tax purposes in the following respects:
Business bad debts are deducted as ____, while nonbusiness bad debts are treated as ____. A business debt can generate a ____, but a nonbusiness bad debt cannot.
A deduction is allowed for the ____ of a business debt, but nonbusiness bad debts can be written off only when they become ____.
Nonbusiness bad debt treatment is limited to _____. However, all of the bad debts of a corporation qualify as ____.
ordinary losses short-term capital losses net operating loss partial worthlessness entirely worthless non corporate taxpayers business bad debts
In an exception to the capital treatment that generally results, §___ permits ordinary loss treatment for losses on the sale or worthlessness of stock of so-called small business corporations.
Gain on the sale of ___ stock remains capital.
1244
The ordinary loss treatment for §1244 stock applied to the first __ of capitalized value of the corporation’s stock.
$1 million
The amount of ordinary loss deductible in any one year from the disposition of 1244 stock is limited to ___.
If the amount of the loss sustained in the taxable year exceeds these amounts, the remainder is considered a ____.
$50,000 (or $100,000 for taxpayers filing a joint return)
capital loss
Only the original holder of §1244 stock, whether an individual or a partnership, qualified for ____ treatment.
If the stock is sold or donated, it loses its ____.
ordinary loss
§1244 status
Special treatment applies if §1244 stock is issued by a corporation in exchange for property that has an adjusted basis above its fair market value immediately before the exchange. (known as ____)
For purposes of determining ordinary loss upon a subsequent sale, the stock basis is reduced to the ____ on the date of the ____.
loss property
fair market value
date
A disadvantage of issuing debt is that it does not qualify under §___. Should the debt become worthless, the taxpayer generally has a ____ rather than the ___ for the stock.
1244
short-term capital loss
ordinary loss
