Chapter 18

Question 1

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.

Answer 1

1031

substantive change

Question 2

§____ 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 _____.

Answer 2

351

substantively changed

Question 3

If the taxpayer receives property other than stock (i.e., cash or other “boot” from the corporation, realized gain is ____.

Answer 3

recognized

Question 4

With both sections 1031 and 351, gain or loss is ____ until a substantive change in the taxpayer’s investment occurs.

Answer 4

postponed

Question 5

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.

Answer 5

like-kind property

realized gain

Question 6

What is the formula to calculate realized gain on a like-kind exchange?

Answer 6

FMV (rec’d)
AB (transferred)
Real G/L

Question 7

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.

Answer 7

realized gain or

boot received

Question 8

§ 351 is ____ if a transaction satisfies the provision’s requirements: (3)

Answer 8

mandatory
1) property is transferred
2) in exchange for stock
and 3) the property transferors are in control 
of the corporation after the exchange.

Question 9

If recognition of gain or loss is desired, the taxpayer must plan to ____ at least of the requirements for §351.

Answer 9

fail to meet

Question 10

Property for purposes of § 351 is any property except for ____.

Answer 10

services

Question 11

A taxpayer must report as income the fair market value of any ____ received as compensation for ____ rendered.

Answer 11

consideration

services

Question 12

If you receive stock as compensation for services, the value of the services you provide is equal to the value of the ____.

Answer 12

stock received

Question 13

Nonrecognition of gain occurs only when the ____ receives stock. Stock for this purpose includes ____ and most ____.

It does not include:

Answer 13

shareholder
common
preferred

non qualified preferred stock
stock rights and stock warrants
corporate debt or securities

Question 14

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.

Answer 14

80
voting power
number of shares

Question 15

Immediately after the exchange, the property transferors must ____ the corporation.

Answer 15

control

Question 16

Control can apply to ____ or ____ if they are all parties to an integrated transaction.

> 1 - doesn’t require simultaneous exchanges

Answer 16

one person

to several taxpayers

Question 17

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

Answer 17

there was no predetermined plan for the ultimate disposition of the stock in place before the exchange

Question 18

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.

Answer 18

member of the transferring group

services not for property

Question 19

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.

Answer 19

relatively small or nominal

Question 20

Once a corporation is in operation, §351 also applies to any later transfers of property for stock by either ___ or ___ shareholders.

Answer 20

new

existing

Question 21

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.

Answer 21

cash or boot
§357a
boot
boot
liabilities

Question 22

The general rule of §357a has two exceptions:

Answer 22

357b and c

Question 23

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

Answer 23

357b

Question 24

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.

Answer 24

357c

Question 25

With §357b, if it’s not related to acquiring property, it is a ____.

Answer 25

tainted liability

Question 26

Section 357 _ trumps section 357 _.

Answer 26

b

c

Question 27

Formula to find the basis in the stock that the stockholder received

Answer 27

Basis in the properties transferred
\+ gain recognized
- boot received
- liability assumed
= basis in the stock received

Question 28

§__ _ 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 ____ ____.

Answer 28

351a
351
taxable transaction

Question 29

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 ____.

Answer 29

substituted basis

Question 30

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.

Answer 30

the property transferred by the taxpayer.
gain recognized
boot

Question 31

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.

Answer 31

carryover
transferor’s basis
gain recognized

Question 32

A transfer of stock for services is not a ___ to a corporation;

Answer 32

taxable transaction

Question 33

Can a corporation deduct as a business expense the fair market value of the stock it issues in consideration of services?

Answer 33

Yes unless the services are such that the payment is characterized as a capital expenditure. (not organizational costs or start-up expenditures)

Question 34

In a§351 transfer, the shareholder’s holding period for stock received in exchange for a capital asset or §1231 property includes ____.

Answer 34

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.

Question 35

The holding period for stock received for any other property (e.g. inventory) begins on ____.

Answer 35

the day after the exchange

Question 36

The corporation’s holding period for property

acquired in a §351 transfer is the holding period of the transferor-shareholder regardless of the ____.

Answer 36

character of the property in the transferor’s hands

Question 37

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.

Answer 37

.

Question 38

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.

Answer 38

capital contribution

Question 39

The basis of property transferred to a corporation by a non shareholder as a contribution to capital is ___.

Answer 39

zero

Question 40

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:

Answer 40

reduced by the amount of the contribution
Depreciable property
Property subject to amortization
Property subject to depletion
All other remaining properties

Question 41

Formula for the basis of property received by a corporation from a shareholder:

Answer 41

transferor’s AB
+ any gain recognized

decreased if built in loss property

Question 42

If you receive cash as a contribution to capital and use it to buy property within a year, the basis of the property is:

Answer 42

Cost

- cash received

Question 43

If stocks and bonds are capital assets in their owner’s hands, losses from their worthlessness are governed by §___.

Answer 43

165(g)(1)

Question 44

Under §165(g)(1), a capital loss materializes as of the ____ in which the stocks of bonds become worthless.

No deduction is allowed for ____.

Answer 44

last day of the taxable year

a mere decline in value

Question 45

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)

Answer 45

investor loss

Question 46

When the stocks or bonds are not capital assets, worthlessness yields ___.

Answer 46

an ordinary loss

Question 47

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 ___.

Answer 47

business or nonbusiness bad debts

Question 48

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 ____.

Answer 48

ordinary losses
short-term capital losses
net operating loss
partial worthlessness
entirely worthless
non corporate taxpayers
business bad debts

Question 49

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.

Answer 49

1244

Question 50

The ordinary loss treatment for §1244 stock applied to the first __ of capitalized value of the corporation’s stock.

Answer 50

$1 million

Question 51

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 ____.

Answer 51

$50,000 (or $100,000 for taxpayers filing a joint return)

capital loss

Question 52

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 ____.

Answer 52

ordinary loss

§1244 status

Question 53

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 ____.

Answer 53

loss property

fair market value
date

Question 54

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.

Answer 54

1244
short-term capital loss
ordinary loss