Corporate Tax 1-4

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Questions and Answers

What effect does the assumption of liability have on the proceeds of a Section 351 exchange?

It is considered as boot in all cases.

It is treated as additional proceeds for determining gain. (correct)

It reduces the amount of cash allowed as boot.

It does not affect the tax implications of the exchange.

According to Section 358(d), how should liabilities assumed by a transferee be treated for determining stock basis?

They should be ignored completely.

They should be treated as taxable income to the shareholder.

They should decrease the stock basis but not below zero. (correct)

They should increase the stock basis.

If a taxpayer sells a property with a basis of $100 and receives $135 in cash with a mortgage assumption of $65, what is the overall financial implication?

The taxpayer has a recognized gain of $135.

The overall proceeds are considered negative due to the mortgage.

The taxpayer incurs a built-in loss of $30 on the transaction. (correct)

The transaction results in a net taxable income of $50.

What is the primary purpose of Section 351 in relation to corporate transactions?

To facilitate tax-free exchanges of property for stock. Signup and view all the answers

What could be the consequence of a negative basis under Section 358?

It may trigger a recognition of gain. Signup and view all the answers

In a Section 351 exchange, which of the following is NOT true regarding the treatment of liabilities?

Assumption of liability prevents the transaction from qualifying under Section 351. Signup and view all the answers

How would a corporation's assumption of a $55 liability impact shareholder proceeds under Section 351?

It is considered as part of the overall exchange value. Signup and view all the answers

What factor could lead to the creation of built-in losses when performing a property transfer?

Having a fair market value that is lower than the basis. Signup and view all the answers

Which statement correctly describes the treatment of capital contributions under tax regulations?

Capital contributions do not constitute gross income to the transferee corporation. Signup and view all the answers

In the context of Section 351 transactions, what happens if a corporation assumes liabilities from a shareholder?

The corporation may claim a deduction when the liabilities are paid. Signup and view all the answers

How does the assignment of income doctrine affect Section 351 transactions?

It cannot replace the treatment of liabilities assumed during the transaction. Signup and view all the answers

What is a key consideration regarding recourse and non-recourse liabilities in a corporate transaction?

Recourse liabilities may alter the investor's basis in their stock differently than non-recourse liabilities. Signup and view all the answers

What is the impact of tax benefit rule in the context of capital contributions?

It can override the provisions of Section 351 in certain cases. Signup and view all the answers

What does Section 357(c)(3) primarily address regarding liabilities?

Liabilities that do not give rise to a gain because income and deduction offset each other Signup and view all the answers

Which statement accurately reflects the contributions to capital under Section 351?

Contributions that do not involve stock buybacks fall outside Section 351 Signup and view all the answers

What is typically a misconception about liabilities assumed in Section 357(c)?

Assumed liabilities generally lead to a recognizable gain Signup and view all the answers

In what circumstance would Section 358(d)(2) apply concerning contributions to capital?

When valid business reasons support the transfer of property without taking stock Signup and view all the answers

How do liabilities impact the basis determination in corporate transactions under Section 357?

Liabilities assumed do not automatically decrease basis if otherwise deductible Signup and view all the answers

Which statement correctly describes the consequences of contributions under Section 351 with respect to stock and liability?

No gain is recognized if the shareholder does not exchange stock or property Signup and view all the answers

Which of the following best describes a valid business reason for property transfers related to capital contributions?

Justifying an asset transfer that lacks direct cash compensation Signup and view all the answers

When do assumed liabilities typically not result in recognizable income gains?

If they align with Section 357 criteria for deductible liabilities Signup and view all the answers

What common misconception exists regarding the application of Section 351 with respect to shareholder exchanges?

Exchanging property for cash always results in tax liabilities Signup and view all the answers

What is required for a transfer of stock to qualify under Section 351?

There must be a predetermined plan for the transfers. Signup and view all the answers

What can invalidate the control requirement under Section 351?

Momentary control breaches due to voluntary dispositions. Signup and view all the answers

How does the timing of transfers impact Section 351 qualifications?

Long intervals between transfers can qualify under Section 351. Signup and view all the answers

What happens to the shareholder's basis when 10 shares of non-voting preferred stock are received?

It is determined by the total investment cost of the common stock sold. Signup and view all the answers

Which of the following statements about voluntary dispositions is correct?

They may not affect the control requirements if under certain conditions. Signup and view all the answers

What is the implication of receiving non-qualified preferred stock in a transaction?

It disqualifies the entire transaction under Section 351. Signup and view all the answers

What is the effect of a binding prearranged plan on stock control?

It is crucial to maintaining control for qualification. Signup and view all the answers

Which of the following scenarios would lead to a valid Section 351 transaction?

B transfers a capital asset under a predetermined plan. Signup and view all the answers

What is NOT a requirement for stock issuance under Section 351?

Transferors must retain their stock for a set duration. Signup and view all the answers

What factor is commonly misunderstood in Section 351 transactions regarding time?

Timing can be flexible as long as a plan is present. Signup and view all the answers

What is the minimum ownership requirement for stockholders to qualify for a transaction under Section 351?

At least 80% of the total voting power and 80% of total shares Signup and view all the answers

In a transaction considered under Section 351, what must the transferors collectively meet?

The structure of a dual ownership requirement Signup and view all the answers

If A transfers a capital asset to her daughter as a gift, how is the basis of the asset determined?

The adjusted basis of the asset to A at the time of the transfer Signup and view all the answers

Which of the following accurately describes the implications of dual ownership requirement under Section 351?

Transferors can have flexibility in the type of stock they receive Signup and view all the answers

What is the result if A's gift to D occurs before the transfer of stock under Section 351?

The gift has no impact on the transfer's qualifications under Section 351 Signup and view all the answers

If a shareholder receives preferred stock as part of a Section 351 transaction, what is the implication?

The shareholder retains the rights to convert it to common stock later Signup and view all the answers

When determining control for purposes of Section 351, which factor is not considered?

The financial status of the shareholders Signup and view all the answers

What is the primary tax implication for the transferor when property is transferred to a corporation under Section 351?

The transferor defers recognition of gain or loss until later Signup and view all the answers

What determines the shareholder basis in stock received under Section 351?

The combined adjusted basis of the property transferred Signup and view all the answers

What characterizes a built-in gain in the context of Section 351 transactions?

It reflects a future taxable event for the corporation Signup and view all the answers

Study Notes

Section 351

Section 351 of the Internal Revenue Code allows for a tax-free exchange of property for stock in a corporation.
To qualify, the transferors must control the corporation immediately after the exchange.
Control is defined as owning at least 80% of the total combined voting power of all classes of stock entitled to vote, and at least 80% of the total number of shares of all other classes of stock.

Liabilities Assumed in 351 Exchanges

Section 357(a) provides that the assumption of a liability by a transferee corporation in connection with a Section 351 exchange will not constitute boot or prevent the exchange from qualifying under Section 351.
Section 358(d) provides that liabilities assumed are treated as money received by the shareholder for purposes of determining basis.
This means that the shareholder's stock basis is decreased by the amount of the liability assumed, but not below zero.

Section 357(c)

Section 357(c) provides an exception to the general rule that liabilities assumed in a Section 351 exchange are treated as boot.
Under this exception, liabilities that would otherwise give rise to a deduction in the normal course of payment do not give rise to gain under Section 357(c).
This is because the income and deduction would be offsetting.

Contributions to Capital

If a shareholder contributes cash or property to a corporation, but does not take back stock, Section 351 does not technically apply.
However, if there is a valid business reason for the transfer, the transfer will be treated as a tax-free contribution to capital.

Collateral Issues

There are some collateral issues related to Section 351, including contributions to capital and the assignment of income doctrine.
A contribution to capital is a transfer of property to a corporation by a shareholder that does not result in the shareholder receiving stock.
The shareholder's basis in their existing stock is increased by the FMV of the property contributed.
The assignment of income doctrine will not override Section 351 in cases where the transferor is assigning income to the transferee corporation.

Examples

Example: A transfers a building with a basis of 30andaFMVof30 and a FMV of 30andaFMVof100 subject to a liability of $55.
A receives stock with an FMV of $45.
Without Section 357(c), A's basis under Section 358 would be negative (-$25) because the liability assumption would reduce their basis below zero.
However, because of Section 357(c)(3), the assumption of the liability will not result in a gain to A.

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Description

Test your knowledge on Section 351 of the Internal Revenue Code, which discusses tax-free exchanges of property for stock. This quiz covers essential concepts including control requirements and liabilities involved in such exchanges. Understand the implications of Sections 357(a) and 358(d) related to shareholder liabilities.