Chapter 8

Question 1

Which statement best describes the concept of realization as it applies to gain or loss? A. Realization is the recording of gain or loss on a tax return. B. Realization is the result of an exchange of property rights in a transaction. C. Realization is the excess of amount realized over adjusted basis. D. Realization is the excess of adjusted basis over amount realized.

Answer 1

B. Realization is the result of an exchange of property rights in a transaction. Realization occurs when a person engages in a transaction.

Question 2

Which of the following amounts is not included in the computation of amount realized in an exchange? A. Cash received B. Fair market value of property received C. Selling expenses D. Adjusted basis of property transferred

Answer 2

D. Adjusted basis of property transferred. The adjusted basis of property transferred is subtracted from the amount realized to compute gain or loss realized.

Question 3

Which of the following amounts is not included in the computation of a property’s adjusted basis in an exchange? A. Selling expenses incurred by the buyer B. Acquisition cost of the buyer C. Capital improvements made to the property by the buyer D. Depreciation of the property by the buyer

Answer 3

A. Selling expenses incurred by the buyer. Selling expenses incurred by the buyer reduce the amount realized in the exchange.

Question 4

Which of the following statements best describes the tax law approach to recognizing gain or loss realized in an exchange? A. Gain and loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code. B. Gain and loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code. C. Gain realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code. D. Loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but gain realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

Answer 4

B. Gain and loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code. The general rule is that gain or loss realized is recognized unless otherwise specifically stated in the Internal Revenue Code.

Question 5

Which of the following requirements do not have to be met in a section 351 transaction? A. Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred. B. In the aggregate, the transferors of property to the corporation must collectively control the corporation immediately after the transfers. C. Only property transferred to a corporation is eligible for deferral. D. All transfers of property to a corporation must be made simultaneously to qualify for deferral.

Answer 5

A. Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred. The control test under section 351 applies in the aggregate.

Question 6

Roberta transfers property with a tax basis of $400 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $350 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is the amount realized by Roberta in the exchange? A. $500 B. $400 C. $350 D. $250

Answer 6

A. $500 $350 fair market value of the stock received plus $150 from the liability assumed by the corporation.

Question 7

Inez transfers property with a tax basis of $200 and a fair market value of $300 to a corporation in exchange for stock with a fair market value of $250 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is the corporation’s tax basis in the property received in the exchange? A. $150 B. $200 C. $250 D. $300

Answer 7

B. $200 The corporation’s basis equals Inez’s tax basis (a carryover basis). Alternatively, the tax basis equals the property’s fair market value of $300 less the gain deferred of $100.

Question 8

Antoine transfers property with a tax basis of $500 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $550 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Antoine’s tax basis in the stock received in the exchange? A. $600 B. $550 C. $500 D. $450

Answer 8

D. $450 The shareholder’s tax basis equals his tax basis in the property transferred (a substituted basis) less any liability assumed by the corporation. If Antoine sells the stock for $550, the gain recognized will be $100, an amount equal to the gain deferred of $100.

Question 9

Camille transfers property with a tax basis of $800 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $850 and $350 in a transaction that qualifies for deferral under section 351. Camille also incurred selling expenses of $100. What is the amount realized by Camille in the exchange? A. $1,200 B. $1,100 C. $850 D. $750

Answer 9

B. $1,100 $850 fair market value of the stock received plus $350 less $100 selling expenses.

Question 10

Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation’s tax basis in the property received in the exchange? A. $800 B. $600 C. $550 D. $450

Answer 10

C. $550 The corporation’s basis in the property equals Carlos’s tax basis of $500 (a carryover basis) plus gain recognized of $50. If the corporation sells the property for $800, it will recognize a gain of $250, an amount equal to the gain deferred on the transfer.

Question 11

Roy transfers property with a tax basis of $800 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $400 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Roy’s tax basis in the stock received in the exchange? A. $800 B. $750 C. $700 D. $500

Answer 11

C. $700 The shareholder’s tax basis equals his tax basis in the property transferred of $800 (a substituted basis) less the $50 liability assumed by the corporation less the fair market value of boot received. If Roy sells the stock for $400, the loss recognized will be $300, an amount equal to the loss deferred of $300.

Question 12

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 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? A. $5,000 B. $4,700 C. $4,600 D. $4,200

Answer 12

B. $4,700 $4,000 fair market value of the stock received plus $400 plus $600 mortgage assumed less $300 selling expenses.

Question 13

Tristan transfers property with a tax basis of $900 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $900 and $200 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation’s tax basis in the property received in the exchange? A. $1,200 B. $1,100 C. $1,000 D. $900

Answer 13

B. $1,100 The corporation’s basis in the property equals Tristan’s tax basis of $900 (a carryover basis) plus gain recognized by Tristan of $200 (the lesser of the gain realized or the boot received). If the corporation sells the property for $1,200, it will recognize a gain of $100, an amount equal to the gain deferred on the transfer.

Question 14

Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil’s tax basis in the stock received in the exchange? A. $6,000 B. $5,000 C. $4,000 D. $3,000

Answer 14

D. $3,000 The shareholder’s tax basis equals her tax basis in the property transferred of $5,000 (a substituted basis) plus gain recognized of $1,000 less boot received of $2,000 less the $1,000 liability assumed by the corporation. If Sybil sells the stock for $3,000, no gain or loss will be realized.

Question 15

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 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? A. $5,000 B. $4,000 C. $3,000 D. $2,000

Answer 15

B. $4,000 The shareholder’s tax basis equals her tax basis in the property transferred of $5,000 (a substituted basis) less boot received of $500 less the $500 liability assumed by the corporation. If Ashley sells the stock for $2,000, a $2,000 loss will be recognized, an amount equal to the loss deferred of $2,000.

Question 16

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle’s tax basis in the stock received in the exchange? A. $900 B. $850 C. $750 D. $700

Answer 16

D. $700 The shareholder’s tax basis equals her tax basis in the property transferred of $800 (a substituted basis) plus gain recognized of $50 less cash received of $50 less the $100 liability assumed by the corporation. If Rachelle sells the stock for $750, the gain recognized will be $50, an amount equal to the gain deferred of $50.

Question 17

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation’s tax basis in the property received in the exchange? A. $900 B. $850 C. $800 D. $750

Answer 17

B. $850 The corporation’s tax basis equals the shareholder’s tax basis in the property transferred of $800 (a substituted basis) plus gain recognized of $50. If the corporation sells the property for $900, the gain recognized will be $50.

Question 18

Which of the following statements best describes the concept of control as it applies to a section 351 transaction? A. Control is defined as the ownership of 80 percent or more of a corporation’s voting stock. B. Control is defined as the ownership of 80 percent or more of the fair market value of a corporation’s stock. C. Control is defined as the ownership of 80 percent or more of a corporation’s voting stock and 80 percent or more of the fair market value of a corporation’s stock. D. Control is defined as the ownership of 80 percent or more of a corporation’s voting stock and 80 percent or more of the total number of shares of each class of nonvoting stock.

Answer 18

D. Control is defined as the ownership of 80 percent or more of a corporation’s voting stock and 80 percent or more of the total number of shares of each class of nonvoting stock.

Question 19

Which of the following class of stock is not allowed to be used in a section 351 transaction? A. Voting common stock B. Voting preferred stock C. Nonvoting preferred stock D. All of these classes of stock can be used in a section 351 transaction.

Answer 19

D. All of these classes of stock can be used in a section 351 transaction. Section 351 is flexible with respect to the stock issued by the transferee corporation, although the voting power test must be met by the transferor shareholders in the aggregate.

Question 20

Which of the following statements best describes the impact of receiving boot in a section 351 transaction? A. Boot received has no impact on the recognition of gain or loss realized in a section 351 transaction. B. Boot received causes gain realized to be recognized, but not loss realized. C. Boot received causes loss realized to be recognized, but not gain realized. D. Boot received causes gain and loss realized to be recognized.

Answer 20

B. Boot received causes gain realized to be recognized, but not loss realized. Boot received causes gain, but not loss, realized to be recognized in an amount not to exceed the gain realized.

Question 21

Sami transferred property with a fair market value of $600 and a tax basis of $300 to a corporation in exchange for stock with a fair market value of $600. In addition, Sami received stock with a fair market value of $50 in exchange for services she provided to the corporation in the incorporation process. Which of the following statements best describes the tax result to Sami because of the exchanges? A. Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351. B. Sami will recognize $50 of compensation income, but she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351. C. Sami will not recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351. D. Sami will not recognize $50 of compensation income, and she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

Answer 21

A. Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351. Sami recognizes $50 of income from services because services are not considered property under §351. She can count the stock she receives for the services in determining if the control test is met because the value of the stock received in exchange for property is greater than 10 percent of the value of the services rendered.

Question 22

Amy transfers property with a tax basis of $900 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $450 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is Amy’s tax basis in the stock received in the exchange? A. $900 B. $750 C. $650 D. $450

Answer 22

B. $750 The shareholder’s tax basis equals her tax basis in the property transferred (a substituted basis) less any liability assumed by the corporation. If Amy sells the stock for $450, the loss recognized will be $300, an amount equal to the loss deferred of $300.

Question 23

Which of the following statements best describes the tax results to a shareholder in a section 351 transaction when liabilities on property transferred to the corporation are assumed by the corporation? A. Liabilities assumed by a corporation on a section 351 transfer are always treated as boot. B. Liabilities assumed by a corporation on a section 351 transfer are never treated as boot. C. Liabilities assumed by a corporation on a section 351 transfer are treated as boot if the total liabilities assumed exceed the total basis of the assets transferred. D. Liabilities assumed by a corporation on a section 351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation.

Answer 23

D. Liabilities assumed by a corporation on a section 351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation. §357(b) treats all liabilities assumed by a corporation as boot if any of the liabilities are assumed for a tax avoidance purpose or there is no business purpose for their assumption.

Question 24

Which of the following statements best describes the “built-in loss” rules that apply to property transferred to a corporation under section 351? A. If the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property’s fair market value. B. If the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property’s tax basis in the hands of the shareholder. C. If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate fair market value of the property. D. If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate tax basis of the property.

Answer 24

C. If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate fair market value of the property. The built-in loss rules under §362(e) apply when the aggregate tax basis of property transferred to a corporation exceeds the aggregate fair market value of the property.

Question 25

Which of the following statements best describes the tax consequences that arise from a contribution of capital to a corporation by an existing shareholder? A. The shareholder recognizes gain and loss on the transfer and the corporation’s basis in the property transferred equals its fair market value. B. The shareholder does not recognize gain and loss on the transfer and the corporation’s basis in the property transferred equals the shareholder’s basis in the property transferred. C. The shareholder recognizes gain and loss on the transfer and the corporation’s basis in the property transferred equals the shareholder’s basis in the property transferred. D. The shareholder does not recognize gain and loss on the transfer and the corporation’s basis in the property transferred equals zero.

Answer 25

B. The shareholder does not recognize gain and loss on the transfer and the corporation’s basis in the property transferred equals the shareholder’s basis in the property transferred. The shareholder gets to add the basis of the property contributed to the stock basis in her existing stock in the corporation.

Question 26

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.

Answer 26

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. §1244 applies only to individuals and limits the treatment of loss as ordinary to $50,000 ($100,000 if married filing jointly).

Question 27

Which of the following statements does not describe a motivation by the buyer or seller in the acquisition or sale of a company? A. Buyers generally prefer to buy assets because they can take a tax basis in the assets acquired equal to the assets’ fair market value. B. Buyers generally prefer to buy stock because they can take a tax basis in the underlying assets of the company acquired equal to the assets’ fair market value. C. Sellers generally prefer to sell assets in a tax-deferred reorganization to avoid higher tax rates imposed on gains from the sale of non-capital assets. D. Sellers generally prefer to sell stock because they can recognize capital gain on the sale taxed at preferential rates.

Answer 27

B. Buyers generally prefer to buy stock because they can take a tax basis in the underlying assets of the company acquired equal to the assets’ fair market value. Buyers generally prefer to buy assets to get a step-up in basis in the assets.

Question 28

Which of the following statements best describes a section 338 transaction? A. A section 338 transaction is an election made by the buyer to treat a stock acquisition as an asset acquisition. B. A section 338 transaction is an election made by the buyer to treat an asset acquisition as a stock acquisition. C. A section 338 transaction is an election made by the seller to treat a stock acquisition as an asset acquisition. D. A section 338 transaction is an election made by the seller to treat an asset acquisition as a stock acquisition.

Answer 28

A. A section 338 transaction is an election made by the buyer to treat a stock acquisition as an asset acquisition. Section 338 is an election made by the buyer to treat a stock acquisition as an asset acquisition.

Question 29

Which of the following statements best describes the tax consequences of a section 338 election? A. Gain or loss is recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a stepped-up basis in the assets acquired. B. Gain or loss is recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a carryover basis in the assets acquired. C. Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a stepped-up basis in the assets acquired. D. Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a carryover basis in the assets acquired.

Answer 29

A. Gain or loss is recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a stepped-up basis in the assets acquired. The tax benefits from a step-up in basis usually is negated by the immediate tax paid on the deemed sale of assets by the acquired corporation.

Question 30

Which of the following statements best describes the continuity of interest principle as it applies to a tax-deferred acquisition? A. Continuity of interest requires each shareholder to receive at least 40 percent of the consideration received in equity of the acquirer. B. Continuity of interest requires shareholders in the aggregate to receive at least 40 percent of the consideration received in equity of the acquirer. C. Continuity of interest requires each shareholder to receive at least 80 percent of the consideration received in equity of the acquirer. D. Continuity of interest requires shareholders in the aggregate to receive at least 80 percent of the consideration received in equity of the acquirer.

Answer 30

B. Continuity of interest requires shareholders in the aggregate to receive at least 40 percent of the consideration received in equity of the acquirer. Continuity of interest is evaluated in the aggregate. The regulations state that 40 percent equity is sufficient to meet the COI test.

Question 31

Which of the following principles does not need to be satisfied for an acquisition to be a tax-deferred reorganization? A. Continuity of interest B. Continuity of purpose C. Business purpose D. Continuity of business enterprise

Answer 31

B. Continuity of purpose. Continuity of purpose is not a judicial principle that applies to tax-deferred reorganizations.

Question 32

Which of the following statements best describes the application of the continuity of enterprise principle to a Type A tax-deferred reorganization? A. The continuity of business enterprise principle must be satisfied for both the acquirer and the target corporation. B. The continuity of business enterprise principle must be satisfied for only the target corporation. C. The continuity of business enterprise principle must be satisfied for only the acquirer. D. The continuity of business enterprise principle does not have to be satisfied as long as the business purpose principle is satisfied.

Answer 32

B. The continuity of business enterprise principle must be satisfied for only the target corporation. The COBE test applies to either the historic business or historic business assets of the target corporation.

Question 33

Simone transferred 100 percent of her stock in Purple Company to Plum Corporation in a Type A merger. In exchange, she received stock in Plum with a fair market value of $500,000 plus $500,000 in cash. Simone’s tax basis in the Purple stock was $200,000. What amount of gain does Simone recognize in the exchange and what is her basis in the Plum stock she receives? A. $800,000 gain recognized and a basis in Plum stock of $1,000,000 B. $800,000 gain recognized and a basis in Plum stock of $500,000 C. $500,000 gain recognized and a basis in Plum stock of $500,000 D. $500,000 gain recognized and a basis in Plum stock of $200,000

Answer 33

D. $500,000 gain recognized and a basis in Plum stock of $200,000 Gain recognized is $500,000, the lesser of gain realized of $800,000 or cash received. The stock basis is the carryover basis of $200,000 plus gain recognized less cash received. If Simone sells the stock for $500,000, she will recognize gain of $300,000, an amount equal to the gain deferred on the exchange.

Question 34

Jamie transferred 100 percent of her stock in Fox Company to Otter Corporation in a Type A merger. In exchange, she received stock in Otter with a fair market value of $400,000 plus $600,000 in cash. Jamie’s tax basis in the Fox stock was $600,000. What amount of gain does Jamie recognize in the exchange and what is her basis in the Otter stock she receives? A. $400,000 gain recognized and a basis in Otter stock of $400,000 B. $600,000 gain recognized and a basis in Otter stock of $400,000 C. $400,000 gain recognized and a basis in Otter stock of $600,000 D. $600,000 gain recognized and a basis in Otter stock of $600,000

Answer 34

A. $400,000 gain recognized and a basis in Otter stock of $400,000 Gain recognized is $400,000, the lesser of gain realized of $400,000 or cash received. The stock basis is the carryover basis of $600,000 plus gain recognized of $400,000 less cash received of $600,000. If Jamie sells the stock for $400,000, she will not recognize additional gain because no gain was deferred in the transaction.

Question 35

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. $500,000 loss recognized and a basis in Jefferson stock of $600,000 B. $500,000 loss recognized and a basis in Jefferson stock of $1,100,000 C. No loss recognized and a basis in Jefferson stock of $1,500,000 D. No loss recognized and a basis in Jefferson stock of $1,100,000

Answer 35

D. No loss recognized and a basis in Jefferson stock of $1,100,000. No loss is recognized when boot is received. Jasmine’s basis in the stock equals her basis in the Woodward stock less the cash received. If Jasmine sells the stock for $600,000, she will recognize loss of $500,000, an amount equal to the loss deferred.

Question 36

Celeste transferred 100 percent of her stock in Supply Chain Company to Marketing Corporation in a Type A merger. In exchange, she received stock in Marketing with a fair market value of $500,000 plus $500,000 in cash. Celeste’s tax basis in the Supply Chain stock was $1,200,000. What amount of loss does Celeste recognize in the exchange and what is her basis in the Marketing stock she receives? A. $200,000 loss recognized and a basis in Marketing stock of $1,200,000 B. No loss recognized and a basis in Marketing stock of $1,200,000 C. $200,000 loss recognized and a basis in Marketing stock of $700,000 D. No loss recognized and a basis in Marketing stock of $700,000

Answer 36

D. No loss recognized and a basis in Marketing stock of $700,000. No loss is recognized because the exchange is tax-deferred. The stock basis is the carryover basis of $1,200,000 less cash received of $500,000. If Celeste sells the stock for $500,000, she will recognize loss of $200,000, an amount equal to the loss deferred.

Question 37

Which of the following statements does not describe a requirement that must be met in a tax-deferred forward triangular merger? A. The 40 percent continuity of interest test must be met with respect to the stock transferred from the acquisition corporation to the target corporation shareholders. B. The acquirer must hold substantially all of the target corporation’s properties after the merger. C. The continuity of business enterprise test must be met with respect to the target corporation. D. The target corporation shareholders must receive voting stock in the acquiring corporation.

Answer 37

D. The target corporation shareholders must receive voting stock in the acquiring corporation. A forward triangular merger is flexible with respect to the stock received by the target shareholders.

Question 38

Which of the following statements does not describe a requirement that must be met in a tax-deferred reverse triangular merger? A. The 40 percent continuity of interest test must be met with respect to the stock transferred from the acquisition corporation to the target corporation shareholders. B. The target must hold substantially all of the target corporation’s properties and the properties of the acquisition subsidiary after the merger. C. The continuity of business enterprise test must be met with respect to the target corporation. D. The target corporation shareholders must receive voting stock in the acquiring corporation.

Answer 38

A. The 40 percent continuity of interest test must be met with respect to the stock transferred from the acquisition corporation to the target corporation shareholders. In a reverse triangular merger, the target shareholders must receive voting stock in the acquiring corporation in exchange for 80 percent or more of the target corporation stock.

Question 39

Which of the following statements best describes the requirement that must be met in a tax-deferred Type B stock-for-stock reorganization? A. The 40 percent continuity of interest test must be met with respect to the stock transferred from the acquisition corporation to the target shareholders. B. The acquiring corporation must hold substantially all of the target’s properties after the acquisition. C. The target corporation shareholders must receive “solely” voting stock in the acquiring corporation in the exchange. D. The target corporation shareholders must receive voting stock in the acquiring corporation in exchange for 80 percent or more of the target corporation stock.

Answer 39

C. The target corporation shareholders must receive “solely” voting stock in the acquiring corporation in the exchange. To be tax-deferred, a Type B stock-for-stock exchange requires solely the exchange of voting stock in the acquiring corporation.

Question 40

Juan transferred 100 percent of his stock in Rosa Company to Azul Corporation in a Type B stock-for-stock exchange. In exchange, he received stock in Azul with a fair market value of $1,000,000. Juan’s tax basis in the Rosa stock was $400,000. What amount of gain does Juan recognize in the exchange and what is his basis in the Azul stock he receives? A. $600,000 gain recognized and a basis in Azul stock of $400,000 B. No gain recognized and a basis in Azul stock of $400,000 C. $600,000 gain recognized and a basis in Azul stock of $1,000,000 D. No gain recognized and a basis in Azul stock of $1,000,000

Answer 40

B. No gain recognized and a basis in Azul stock of $400,000 No gain is recognized and the Azul stock basis is the basis of the Rosa stock transferred. If Juan sells the stock for $1,000,000, he will recognize gain of $600,000, an amount equal to the gain deferred on the exchange.

Question 41

Julian transferred 100 percent of his stock in Lemon Company to Apricot Corporation in a Type B stock-for-stock exchange. In exchange, he received stock in Apricot with a fair market value of $200,000. Julian’s tax basis in the Lemon stock was $400,000. What amount of loss does Julian recognize in the exchange and what is his basis in the Apricot stock he receives? A. $200,000 loss recognized and a basis in Apricot stock of $200,000 B. No loss recognized and a basis in Apricot stock of $400,000 C. $200,000 loss recognized and a basis in Apricot stock of $400,000 D. No loss recognized and a basis in Apricot stock of $200,000

Answer 41

B. No loss recognized and a basis in Apricot stock of $400,000 No loss is recognized and the Apricot stock basis is the basis of the Lemon stock transferred. If Julian sells the stock for $200,000, he will recognize loss of $200,000, an amount equal to the loss deferred on the exchange.

Question 42

Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation? A. All complete liquidations are taxable to the shareholders. B. Complete liquidations are taxable to all individual shareholders. C. Complete liquidations are taxable to all corporate shareholders owning stock of the liquidated corporation representing less than 80 percent or more of voting power and value. D. Complete liquidations are tax deferred to corporate shareholders owning stock of the liquidated corporation representing 80 percent or more of voting power and value.

Answer 42

A. All complete liquidations are taxable to the shareholders. Corporations owning stock representing 80 percent or more of voting power and value receive tax deferral in a complete liquidation.

Question 43

Jalen transferred his 10 percent interest to Wolverine Company as part of a complete liquidation of the company. In the exchange, he received land with a fair market value of $100,000. Jalen’s basis in the Wolverine stock was $50,000. The land had a basis to Wolverine Company of $80,000. What amount of gain does Jalen recognize in the exchange and what is his basis in the land he receives? A. $50,000 gain recognized and a basis in the land of $100,000 B. $50,000 gain recognized and a basis in the land of $80,000 C. No gain recognized and a basis in the land of $80,000 D. No gain recognized and a basis in the land of $50,000

Answer 43

A. $50,000 gain recognized and a basis in the land of $100,000. The exchange is taxable. Jalen recognizes the full amount of gain of $50,000 and receives a basis in the land equal to the land’s fair market value.

Question 44

Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange, Red Blossom received land with a fair market value of $500,000. The corporation’s basis in the Tea Company stock was $300,000. The land had a basis to Tea Company of $600,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives? A. $200,000 gain recognized and a basis in the land of $600,000 B. $200,000 gain recognized and a basis in the land of $500,000 C. No gain recognized and a basis in the land of $600,000 D. No gain recognized and a basis in the land of $300,000

Answer 44

B. $200,000 gain recognized and a basis in the land of $500,000. The exchange is taxable. Red Blossom recognizes the full amount of gain of $200,000 and receives a basis in the land equal to the land’s fair market value.

Question 45

Paladin Corporation transferred its 90 percent interest to Furman Company as part of a complete liquidation of the company. In the exchange, Paladin received land with a fair market value of $1,000,000. The corporation’s basis in the Furman Company stock was $400,000. The land had a basis to Furman Company of $200,000. What amount of gain does Paladin recognize in the exchange and what is its basis in the land it receives? A. $600,000 gain recognized and a basis in the land of $1,000,000 B. $600,000 gain recognized and a basis in the land of $400,000 C. No gain recognized and a basis in the land of $400,000 D. No gain recognized and a basis in the land of $200,000

Answer 45

D. No gain recognized and a basis in the land of $200,000. The exchange is tax deferred. Paladin takes a basis in the land equal to Furman’s basis in the land.

Question 46

Katarina transferred her 10 percent interest to Spartan Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $200,000. Katarina’s basis in the Spartan stock was $100,000. The land had a basis to Spartan Company of $50,000. What amount of gain does Spartan recognize in the exchange and what is Katarina’s basis in the land she receives? A. $100,000 gain recognized by Spartan and a basis in the land of $200,000 B. $150,000 gain recognized by Spartan and a basis in the land of $200,000 C. No gain recognized by Spartan and a basis in the land of $100,000 D. No gain recognized by Spartan and a basis in the land of $50,000

Answer 46

B. $150,000 gain recognized by Spartan and a basis in the land of $200,000. The exchange is taxable to Spartan. Spartan recognizes the full amount of gain of $150,000 and Katarina receives a basis in the land equal to the land’s fair market value.

Question 47

Which of the following statements best describes the recognition of loss on property transferred to shareholders in complete liquidation of a corporation? A. The liquidated corporation always recognizes loss on the distribution of property in complete liquidation of the corporation. B. The liquidated corporation never recognizes loss on the distribution of property in complete liquidation of the corporation. C. The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation if the property is distributed to individuals who are not related parties to the corporation. D. The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation only if the property is distributed to individuals who are related parties to the corporation.

Answer 47

C. The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation if the property is distributed to individuals who are not related parties to the corporation. To recognize loss on the distribution of property in a complete liquidation, the corporation must distribute the property to unrelated persons who are not 80 percent corporate shareholders. Losses can be recognized on distributions to related parties if the distribution is pro rata and the property is not disqualified property.

Question 48

Billie transferred her 20 percent interest to Jean Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $200,000. Billie’s basis in the Jean stock was $100,000. The land had a basis to Jean Company of $400,000. What amount of loss does Jean recognize in the exchange and what is Billie’s basis in the land she receives? Billie is not considered a related party to Jean Company. A. $200,000 loss recognized by Jean and a basis in the land of $200,000 B. $200,000 loss recognized by Jean and a basis in the land of $400,000 C. No loss recognized by Jean and a basis in the land of $200,000 D. No loss recognized by Jean and a basis in the land of $400,000

Answer 48

A. $200,000 loss recognized by Jean and a basis in the land of $200,000 Jean recognizes the loss of $200,000 and Billie’s basis in the land is equal to the land’s fair market value.

Question 49

Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $800,000. Robin’s basis in the Cardinal stock was $900,000. The land had a basis to Cardinal Company of $1,000,000. What amount of loss does Cardinal recognize in the exchange and what is Robin’s basis in the land she receives? The distribution was non pro rata to Robin, a related person. A. $200,000 loss recognized by Cardinal and a basis in the land of $1,000,000 B. $200,000 loss recognized by Cardinal and a basis in the land of $800,000 C. No loss recognized by Cardinal and a basis in the land of $1,000,000 D. No loss recognized by Cardinal and a basis in the land of $800,000

Answer 49

D. No loss recognized by Cardinal and a basis in the land of $800,000. Cardinal is not permitted to recognize the loss of $200,000 because Robin is a related person and the distribution is non pro rata. Robin’s basis in the land is equal to the land’s fair market value.

Question 50

Packard Corporation transferred its 100 percent interest to State Company as part of a complete liquidation of the company. In the exchange, Packard received land with a fair market value of $300,000. Packard’s basis in the State stock was $600,000. The land had a basis to State Company of $500,000. What amount of loss does State recognize in the exchange and what is Packard’s basis in the land it receives? A. $200,000 loss recognized by State and a basis in the land of $300,000 B. $200,000 loss recognized by State and a basis in the land of $500,000 C. No loss recognized by State and a basis in the land of $300,000 D. No loss recognized by State and a basis in the land of $500,000

Answer 50

D. No loss recognized by State and a basis in the land of $500,000. State does not recognize the loss of $200,000 because the liquidation is tax-deferred to Packard. Packard’s basis in the land is equal to State’s basis in the land (a carryover basis).