Podcast
Questions and Answers
A sole proprietor incorporates their business, contributing both capital assets and Section 1231 property. How is the holding period determined for the shares received in exchange?
A sole proprietor incorporates their business, contributing both capital assets and Section 1231 property. How is the holding period determined for the shares received in exchange?
A shareholder contributes services in exchange for stock in a newly formed corporation. How is the shareholder's basis in the stock determined?
A shareholder contributes services in exchange for stock in a newly formed corporation. How is the shareholder's basis in the stock determined?
A corporation receives property from a shareholder in exchange for stock. The shareholder recognizes a gain on the transfer. How does the corporation determine its basis in the property?
A corporation receives property from a shareholder in exchange for stock. The shareholder recognizes a gain on the transfer. How does the corporation determine its basis in the property?
A corporation receives equipment with a built-in loss (adjusted basis exceeds fair market value) from a shareholder in exchange for stock. What is the corporation's basis in the equipment for depreciation purposes?
A corporation receives equipment with a built-in loss (adjusted basis exceeds fair market value) from a shareholder in exchange for stock. What is the corporation's basis in the equipment for depreciation purposes?
Signup and view all the answers
Under Section 351, what condition must be met immediately after the exchange to qualify for nonrecognition of gain or loss on property transferred to a corporation?
Under Section 351, what condition must be met immediately after the exchange to qualify for nonrecognition of gain or loss on property transferred to a corporation?
Signup and view all the answers
Which of the following is not considered property for the purposes of Section 351?
Which of the following is not considered property for the purposes of Section 351?
Signup and view all the answers
When stock is exchanged for services, how is the value of the stock treated for income tax purposes?
When stock is exchanged for services, how is the value of the stock treated for income tax purposes?
Signup and view all the answers
Which characteristic would disqualify preferred stock from being counted towards the 80% ownership test in a Section 351 exchange?
Which characteristic would disqualify preferred stock from being counted towards the 80% ownership test in a Section 351 exchange?
Signup and view all the answers
Which of the following scenarios would be considered a transfer of 'property' under Section 351?
Which of the following scenarios would be considered a transfer of 'property' under Section 351?
Signup and view all the answers
A taxpayer transfers an asset with a basis of $20,000 to a corporation solely for stock worth $30,000 in a Section 351 exchange. What amount of gain should the taxpayer recognise?
A taxpayer transfers an asset with a basis of $20,000 to a corporation solely for stock worth $30,000 in a Section 351 exchange. What amount of gain should the taxpayer recognise?
Signup and view all the answers
Regarding Section 351 property exchange for stock in a corporation, what is required to be attached to the tax returns?
Regarding Section 351 property exchange for stock in a corporation, what is required to be attached to the tax returns?
Signup and view all the answers
A shareholder contributes property to a corporation in exchange for stock and cash (boot). The property has a basis of $30,000 and a fair market value of $50,000, and the shareholder receives $10,000 in cash. What is the shareholder's recognized gain?
A shareholder contributes property to a corporation in exchange for stock and cash (boot). The property has a basis of $30,000 and a fair market value of $50,000, and the shareholder receives $10,000 in cash. What is the shareholder's recognized gain?
Signup and view all the answers
If the fair market value (FMV) of property received in an exchange cannot be ascertained, what value should be used?
If the fair market value (FMV) of property received in an exchange cannot be ascertained, what value should be used?
Signup and view all the answers
What percentage of stock must a shareholder hold immediately after a Section 351 transaction to potentially maintain the same basis in transferred property?
What percentage of stock must a shareholder hold immediately after a Section 351 transaction to potentially maintain the same basis in transferred property?
Signup and view all the answers
In a Section 351 transaction, which of the following factors could affect the corporation's basis in the property received?
In a Section 351 transaction, which of the following factors could affect the corporation's basis in the property received?
Signup and view all the answers
Shareholder A contributed land in exchange for 90% of stock. Shareholder also receives cash. How is the cash treated in determining the corporation's basis in the land?
Shareholder A contributed land in exchange for 90% of stock. Shareholder also receives cash. How is the cash treated in determining the corporation's basis in the land?
Signup and view all the answers
If a shareholder contributes property to a corporation in a Section 351 exchange and receives both stock and cash (boot), how does the boot affect the shareholder's recognized gain?
If a shareholder contributes property to a corporation in a Section 351 exchange and receives both stock and cash (boot), how does the boot affect the shareholder's recognized gain?
Signup and view all the answers
A shareholder transfers property with a basis of $50,000 and a fair market value of $80,000 to a corporation in a Section 351 exchange. The shareholder receives stock worth $60,000 and cash of $20,000. What is the shareholder's recognized gain?
A shareholder transfers property with a basis of $50,000 and a fair market value of $80,000 to a corporation in a Section 351 exchange. The shareholder receives stock worth $60,000 and cash of $20,000. What is the shareholder's recognized gain?
Signup and view all the answers
In an exchange transaction, Jesse Jenkins transferred land worth $50,000 to his 80 percent controlled corporation for additional stock of the corporation worth $20,000 and cash of $20,000. The basis of the property to him was $15,000 and was subject to a $10,000 mortgage which the corporation assumed. Jenkins must report a gain of:
In an exchange transaction, Jesse Jenkins transferred land worth $50,000 to his 80 percent controlled corporation for additional stock of the corporation worth $20,000 and cash of $20,000. The basis of the property to him was $15,000 and was subject to a $10,000 mortgage which the corporation assumed. Jenkins must report a gain of:
Signup and view all the answers
Mr. Smith transferred a building that had an adjusted basis of $50,000 and a fair market value of $105,000 to XYZ Corporation in exchange for 100% of XYZ's stock and $10,000 cash. The building was subject to a mortgage of $20,000, which XYZ assumed for valid business reasons. The fair market value of the stock on the date of the transfer was $75,000. What are the amounts of Smith's realized gain and recognized gain?
Mr. Smith transferred a building that had an adjusted basis of $50,000 and a fair market value of $105,000 to XYZ Corporation in exchange for 100% of XYZ's stock and $10,000 cash. The building was subject to a mortgage of $20,000, which XYZ assumed for valid business reasons. The fair market value of the stock on the date of the transfer was $75,000. What are the amounts of Smith's realized gain and recognized gain?
Signup and view all the answers
Andrew transferred an office building that had an adjusted basis of $180,000 and a fair market value of $350,000 to Barry Corporation in exchange for 80% of Barry's only class of stock. The building was subject to a mortgage of $200,000, which Barry assumed for valid business reasons. The fair market value of the stock on the date of the transfer was $150,000. What is the amount of Andrew's recognized gain?
Andrew transferred an office building that had an adjusted basis of $180,000 and a fair market value of $350,000 to Barry Corporation in exchange for 80% of Barry's only class of stock. The building was subject to a mortgage of $200,000, which Barry assumed for valid business reasons. The fair market value of the stock on the date of the transfer was $150,000. What is the amount of Andrew's recognized gain?
Signup and view all the answers
Ms. D transferred the following assets to Corporation E:
Adjusted Basis Fair Market Value
Cash $1,000 $1,000
Equipment 2,000 1,500
Land 4,500 6,000
In exchange, Ms. D received 51% of E's only class of outstanding stock. The stock had no established value. What is Corporation E's total basis in all the assets received, assuming that Ms. D recognized the correct amount of gain on the exchange?
Ms. D transferred the following assets to Corporation E: Adjusted Basis Fair Market Value Cash $1,000 $1,000 Equipment 2,000 1,500 Land 4,500 6,000 In exchange, Ms. D received 51% of E's only class of outstanding stock. The stock had no established value. What is Corporation E's total basis in all the assets received, assuming that Ms. D recognized the correct amount of gain on the exchange?
Signup and view all the answers
Hank transfers land with an adjusted basis of $500,000 to Handy Hank's, Inc. In exchange, he receives shares of stock with a fair market value of $300,000 and cash in the amount of $175,000. Hank owns 51% of all the outstanding stock of Handy Hank's, Inc., immediately after the transfer. What is Hank's deductible loss on the transaction, if any?
Hank transfers land with an adjusted basis of $500,000 to Handy Hank's, Inc. In exchange, he receives shares of stock with a fair market value of $300,000 and cash in the amount of $175,000. Hank owns 51% of all the outstanding stock of Handy Hank's, Inc., immediately after the transfer. What is Hank's deductible loss on the transaction, if any?
Signup and view all the answers
Jack transferred property having an adjusted basis of $42,000 and a fair market value of $50,000 to Corporation X. In exchange for the property, he received $5,000 cash, an automobile having an adjusted basis of $6,000 and a fair market value of $10,000, and 80% of Corporation X's only class of stock. At the time of the transfer, the Corporation X stock that Jack received had a fair market value of $35,000. What is the amount of Jack's recognized gain?
Jack transferred property having an adjusted basis of $42,000 and a fair market value of $50,000 to Corporation X. In exchange for the property, he received $5,000 cash, an automobile having an adjusted basis of $6,000 and a fair market value of $10,000, and 80% of Corporation X's only class of stock. At the time of the transfer, the Corporation X stock that Jack received had a fair market value of $35,000. What is the amount of Jack's recognized gain?
Signup and view all the answers
Sam owns 100% of M Corporation's single class of stock. Sam transfers land and a building having a $30,000 and $100,000 adjusted basis, respectively, to M Corporation in exchange for additional M Corporation common stock worth $200,000 and Q Corporation stock worth $20,000. The Q Corporation stock had a $5,000 basis on M Corporation's books. Peter transfers $50,000 in cash for 15% of the M Corporation common stock. What amount of gain or loss is recognized by Sam and M Corporation on the exchange?
Sam owns 100% of M Corporation's single class of stock. Sam transfers land and a building having a $30,000 and $100,000 adjusted basis, respectively, to M Corporation in exchange for additional M Corporation common stock worth $200,000 and Q Corporation stock worth $20,000. The Q Corporation stock had a $5,000 basis on M Corporation's books. Peter transfers $50,000 in cash for 15% of the M Corporation common stock. What amount of gain or loss is recognized by Sam and M Corporation on the exchange?
Signup and view all the answers
In a Sec. 351 transaction, Mr. Biller transferred assets with an adjusted basis of $76,000 and a fair market value of $80,000 to Bay View Corporation in exchange for its capital stock with a fair market value of $72,000. Bay View Corporation also assumed a liability from Mr. Biller of $81,000. What is Mr. Biller's recognized gain?
In a Sec. 351 transaction, Mr. Biller transferred assets with an adjusted basis of $76,000 and a fair market value of $80,000 to Bay View Corporation in exchange for its capital stock with a fair market value of $72,000. Bay View Corporation also assumed a liability from Mr. Biller of $81,000. What is Mr. Biller's recognized gain?
Signup and view all the answers
Sarah acquired 90% of Fast Corporation's shares in exchange for consulting services worth $85,000. The fair market value of 90% of Fast Corporation's shares is $93,500. How much income does Sarah recognize?
Sarah acquired 90% of Fast Corporation's shares in exchange for consulting services worth $85,000. The fair market value of 90% of Fast Corporation's shares is $93,500. How much income does Sarah recognize?
Signup and view all the answers
Anthony, Bill, and Chester decided to form Paradise Corporation. Anthony transferred property with an adjusted basis of $35,000 and a fair market value of $44,000 for 440 shares of stock. Bill exchanged $33,000 cash for 330 shares of stock. Chester performed services valued at $33,000 for 330 shares of stock. The fair market value of Paradise Corporation's stock is $100 per share. What is Paradise's basis in the property received from Anthony?
Anthony, Bill, and Chester decided to form Paradise Corporation. Anthony transferred property with an adjusted basis of $35,000 and a fair market value of $44,000 for 440 shares of stock. Bill exchanged $33,000 cash for 330 shares of stock. Chester performed services valued at $33,000 for 330 shares of stock. The fair market value of Paradise Corporation's stock is $100 per share. What is Paradise's basis in the property received from Anthony?
Signup and view all the answers
Mr. L transferred the following assets and liabilities to Corporation K:
Adjusted Basis | Fair Market Value
Building $10,000 | $60,000
Mortgage on building 40,000 | 40,000
Truck 5,000 | 10,000
Machine 20,000 | 15,000
In the exchange, Mr. L received 95% of K's only class of outstanding stock. What is K's total basis in the assets received, assuming that Mr. L properly recognized the true amount of gain on the exchange?
Mr. L transferred the following assets and liabilities to Corporation K: Adjusted Basis | Fair Market Value Building $10,000 | $60,000 Mortgage on building 40,000 | 40,000 Truck 5,000 | 10,000 Machine 20,000 | 15,000 In the exchange, Mr. L received 95% of K's only class of outstanding stock. What is K's total basis in the assets received, assuming that Mr. L properly recognized the true amount of gain on the exchange?
Signup and view all the answers
Ms. R transferred property with an adjusted basis of $35,000 and a fair market value of $40,000 to Rain Corporation in exchange for 60% of Rain Corporation's only class of stock. At the time of transfer, the stock Ms. R received had a fair market value of $45,000. What is Rain Corporation's basis in the property after the exchange?
Ms. R transferred property with an adjusted basis of $35,000 and a fair market value of $40,000 to Rain Corporation in exchange for 60% of Rain Corporation's only class of stock. At the time of transfer, the stock Ms. R received had a fair market value of $45,000. What is Rain Corporation's basis in the property after the exchange?
Signup and view all the answers
Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation
Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation
Signup and view all the answers
Stock exchanged for services is counted toward the 80%-ownership
Stock exchanged for services is counted toward the 80%-ownership
Signup and view all the answers
To the extent the shareholder receives the corporation's stock solely in exchange for property, nonrecognition is required.
To the extent the shareholder receives the corporation's stock solely in exchange for property, nonrecognition is required.
Signup and view all the answers
The shareholder recognizes gain realized to the extent of money and the FMV of other property received in the exchange.
The shareholder recognizes gain realized to the extent of money and the FMV of other property received in the exchange.
Signup and view all the answers
The corporation recognizes no gain on exchange of its stock for property (including money).
The corporation recognizes no gain on exchange of its stock for property (including money).
Signup and view all the answers
The shareholder recognizes gain realized to the extent of money and the [blank] of other property received in the exchange.
The shareholder recognizes gain realized to the extent of money and the [blank] of other property received in the exchange.
Signup and view all the answers
Flashcards
Redemption right
Redemption right
The issuer or a related person can buy back the stock if likely exercised on issue date.
Variable dividend rate
Variable dividend rate
Dividend rate changes based on interest rates or commodity prices.
Sec. 351 exchange
Sec. 351 exchange
Tax-free exchange of property for stock if only stock is received.
Realized gain vs. recognized gain
Realized gain vs. recognized gain
Signup and view all the flashcards
Disparate value
Disparate value
Signup and view all the flashcards
Boot in exchanges
Boot in exchanges
Signup and view all the flashcards
FMV determination
FMV determination
Signup and view all the flashcards
Gain recognition
Gain recognition
Signup and view all the flashcards
Corporate Formation
Corporate Formation
Signup and view all the flashcards
Section 351
Section 351
Signup and view all the flashcards
Recognized Gain or Loss
Recognized Gain or Loss
Signup and view all the flashcards
Control
Control
Signup and view all the flashcards
Nonqualified Preferred Stock
Nonqualified Preferred Stock
Signup and view all the flashcards
Fair Market Value (FMV)
Fair Market Value (FMV)
Signup and view all the flashcards
Tax Consequences
Tax Consequences
Signup and view all the flashcards
Split Holding Period
Split Holding Period
Signup and view all the flashcards
Boot Basis
Boot Basis
Signup and view all the flashcards
Basis of Shareholder in Stock for Services
Basis of Shareholder in Stock for Services
Signup and view all the flashcards
Initial Carryover Basis for Corporation
Initial Carryover Basis for Corporation
Signup and view all the flashcards
Tacked Holding Period
Tacked Holding Period
Signup and view all the flashcards
Sec. 351 transaction
Sec. 351 transaction
Signup and view all the flashcards
Basis of Property Acquired
Basis of Property Acquired
Signup and view all the flashcards
Cash Boot in Sec. 351
Cash Boot in Sec. 351
Signup and view all the flashcards
Majority Shareholder
Majority Shareholder
Signup and view all the flashcards
Transferor's basis
Transferor's basis
Signup and view all the flashcards
Jesse Jenkins's gain
Jesse Jenkins's gain
Signup and view all the flashcards
Mr. Smith's realized gain
Mr. Smith's realized gain
Signup and view all the flashcards
Andrew's recognized gain
Andrew's recognized gain
Signup and view all the flashcards
Ms. D's total basis
Ms. D's total basis
Signup and view all the flashcards
Stock basis adjustments
Stock basis adjustments
Signup and view all the flashcards
Hank's deductible loss
Hank's deductible loss
Signup and view all the flashcards
Jack's recognized gain
Jack's recognized gain
Signup and view all the flashcards
Price Corporation's gain on exchange
Price Corporation's gain on exchange
Signup and view all the flashcards
Sam's gain from Q Corporation stock
Sam's gain from Q Corporation stock
Signup and view all the flashcards
Mr. Biller's recognized gain
Mr. Biller's recognized gain
Signup and view all the flashcards
Sarah's recognized income
Sarah's recognized income
Signup and view all the flashcards
Anthony's basis in property
Anthony's basis in property
Signup and view all the flashcards
Rain Corporation's basis in property
Rain Corporation's basis in property
Signup and view all the flashcards
Cash boot
Cash boot
Signup and view all the flashcards
Nonrecognition gain conditions
Nonrecognition gain conditions
Signup and view all the flashcards
Liabilities in exchanges
Liabilities in exchanges
Signup and view all the flashcards
Ownership test for control
Ownership test for control
Signup and view all the flashcards
Tax-free transfer qualification
Tax-free transfer qualification
Signup and view all the flashcards
Adjusted basis
Adjusted basis
Signup and view all the flashcards
Basis for services vs. property
Basis for services vs. property
Signup and view all the flashcards
Section 351 property handling
Section 351 property handling
Signup and view all the flashcards
Value of received stock
Value of received stock
Signup and view all the flashcards
Fair market value in exchanges
Fair market value in exchanges
Signup and view all the flashcards
Recognized gain limitation
Recognized gain limitation
Signup and view all the flashcards
Nonqualified transfers
Nonqualified transfers
Signup and view all the flashcards
Study Notes
Corporate Formation - Recognized Gain or Loss
- Once a corporation is formed, investors transfer money, property, or services for company stock or debt. This exchange can have tax implications for both parties.
- Section 351 aims to prevent tax disadvantages during incorporation and also to prevent recognizing losses while maintaining ownership of the loss assets through stock ownership.
- No gain or loss is recognized when property is exchanged for stock (including treasury stock) if one or more individuals, trusts, estates, partnerships, associations, companies or corporations control the corporation immediately afterward. This includes cash, tangible, and intangible property.
- Control is defined as owning 80% or more of the voting stock and 80% or more of each class of nonvoting stock. This ownership requirement also refers to shareholders' stock ownership
- Stock exchanged for services is valued at fair market value (FMV) and considered gross income for the shareholder.
- Nonqualified preferred stock is not counted towards the 80% control threshold.
- Nonqualified preferred stock has characteristics such as the right for the issuer or related party to redeem or purchase the stock, a requirement for such redemption or purchase, likely exercise of this right, and varying dividends based on interest rates, commodities prices, or similar economic indices.
Solely for Stock
- Gains are not recognized when shareholders receive stock solely in exchange for property.
- An asset's disparity in value from the stock received isn't a factor in calculating gain or loss. Additional transactions (like compensation or dividends) may result in income and are not treated as part of the initial exchange.
- Section 351 can apply to exchanges occurring after the corporation forms.
- Treasury stock can be exchanged under Section 351.
- The tax return must include details regarding the exchange.
- If the FMV of the stock is not equal to the property's FMV, there may be additional income or loss.
- Inequality in the values of the stock and the property exchanged is not relevant in itself.
- Additional income may arise if the disparity represents additional transactions (e.g. compensation, constructive dividends).
- Section 351 can also apply to property contributions without the issuance of stock.
Boot
- Gains are recognized when money or other property with FMV (besides stock) is received.
- The FMV of the property given is used if the FMV of the received property can't be determined.
- Character of the gain depends on the exchanged property.
- No losses are recognized when boot is received.
Liabilities
- Section 351 applies when a corporation assumes a shareholder's liability or receives property subject to a liability.
- Liabilities are typically not considered "boot".
- The liability is recognized as income to the extent it surpasses the adjusted basis of the exchanged property. This contrasts with like-kind exchanges, where liabilities are treated as boot.
- The amount of liabilities is recognized as a gain only to the extent it exceeds the adjusted basis of all contributed property.
- The liability is recognized as income if it exceeds the assets basis.
Stock Issued for Services
- Stock issued for services is not qualifying under Section 351.
- The value of the stock received for services is considered ordinary income for the recipient.
Basis of Assets Transferred
- The initial basis of transferred assets in a tax-free transaction (under Section 351) equals their prior basis, adjusted appropriately.
- Cash and the adjusted basis of contributed property are considered during calculations.
- All liabilities assumed by the corporation are treated as boot when calculating stock basis (except those used for gain purposes).
- Property's holding period is typically tacked onto the stock holding period.
- FMV is typically used to determine the shareholder's stock basis, calculated from the stock exchanged for services.
Basis of Corporation in Property
- The corporation's initial basis in exchanged property from a control shareholder is an adjusted carryover basis.
- This basis considers the shareholder's recognized gain.
- Allowable depreciation is calculated based on the time the corporation held the asset.
- When a shareholder's adjusted basis is higher than the FMV of the received property (built-in loss), the basis is limited to the FMV. The holding period of property is tacked on to the holding period of the stock received.
- This applies when nothing is returned to the shareholder.
- This basis is also the corporation’s initial depreciable basis in the property. Allowable depreciation is calculated based on how long the corporation held the asset.
- If the corporation assumes a liability, it's treated as boot. If the amount of liability exceeds the adjusted basis of the contributed property, the excess is treated as gain.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz explores the tax implications involved in corporate formation, particularly focusing on Section 351. Understand how transfers of money, property, or services for stock can affect gain or loss recognition for both corporations and shareholders. Delve into concepts like control and fair market value in the context of these transactions.
