Chapter 04 Homework Questions

Topics: Stock market, Corporation, Stock Pages: 27 (5581 words) Published: September 24, 2013
Name: ________________________ Class: ___________________ Date: __________

ID: A

Chapter 04
True/False
Indicate whether the statement is true or false.
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1. Section 351 (which permits transfers to controlled corporations to be tax deferred) can be justified under the wherewithal to pay concept.

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2. Similar to like-kind exchanges, the receipt of “boot” under § 351 can cause loss to be recognized.

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3. Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000.

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4. In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder.

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5. In a § 351 transfer, the receipt of boot is not taxed if the shareholder has a realized loss.

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6. In a § 351 transfer, gain will be recognized to the extent of the lesser of realized gain or the boot received.

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7. Allen transfers marketable securities with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Heron Corporation. In addition, he receives cash of $40,000. Allen recognizes a capital gain of $40,000 on the transfer.

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8. The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.

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9. The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

____ 10. A secret process and patentable invention both constitute “property” for purposes of § 351. ____ 11. Since services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

____ 12. The receipt of securities (i.e., long-term debt) in exchange for the transfer of appreciated property to a controlled corporation results in recognition of realized gain to the transferor. ____ 13. In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable. ____ 14. The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor. ____ 15. Jill transfers property worth $200,000 (basis of $190,000) to Blue Corporation. In return, she receives 80% of the stock in Blue Corporation (fair market value of $180,000) and a long-term note, executed by Blue and made payable to Jill (fair market value of $20,000). Jill recognizes gain of $20,000 on the transfer.

2

Name: ________________________

ID: A

____ 16. Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land (fair market value of $20,000) for 20 shares; and Ron, cattle (fair market value of $9,000) for 9 shares and services (fair market value of $21,000) for 21 shares. Section 351 will not apply in this situation because the control requirement has not been satisfied. ____ 17. In order to retain the services of Bonnie, a key employee in Ralph’s sole proprietorship, Ralph contracts with Bonnie to make her a 25% owner. Ralph incorporates the business receiving in return 100% of the stock. Three days later, Ralph transfers 25% of the stock to Bonnie. Under these circumstances, § 351 will not apply to the incorporation of Ralph’s business.

____ 18. One month after Sally incorporates her sole proprietorship, she gives 25% of the stock to her children. Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement. ____ 19. A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation. ____ 20. The use of § 351 is not...
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