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Questions and Answers

What is the primary purpose of basis reduction in the context of shareholder contributions?

  • To maintain the original basis for future transactions
  • To reduce the shareholder's basis to its fair market value (correct)
  • To increase the shareholder's tax liability
  • To eliminate any built-in losses for the corporation
  • Which of the following assets contributed by shareholders would typically not recognize gain or loss under a tax-free exchange?

  • Inventory with a basis of $5,000 and value of $10,000 (correct)
  • Land with an adjusted basis of $25,000 and value of $20,000 (correct)
  • Cash contribution of $25,000
  • Equipment with an adjusted basis of $5,000 and value of $25,000
  • In the case of property contributions, what is one key limitation regarding loss recognition?

  • Losses can only be recognized to the extent that the fair market value exceeds the adjusted basis
  • Losses are not recognized if the property has a built-in loss (correct)
  • Losses on contributions are limited to cash amounts only
  • Losses are always recognized regardless of the basis
  • What is the holding period for property received by a corporation in a Section 351 exchange?

    <p>Takes on the holding period of the property contributed by shareholders</p> Signup and view all the answers

    How is the adjusted basis of equipment determined for shareholder A in the formation of X corporation?

    <p>The original cost of the equipment minus accumulated depreciation</p> Signup and view all the answers

    What is the primary basis for a shareholder's stock when cash is contributed during corporate formation?

    <p>The face value of cash contributed</p> Signup and view all the answers

    What happens generally when property is contributed to a corporation in exchange for stock, without special interventions?

    <p>The property is treated as sold or exchanged for fair market value</p> Signup and view all the answers

    Which of the following is NOT a basic requirement under Section 351 for a tax-free exchange?

    <p>All shareholders must have equal control before the exchange</p> Signup and view all the answers

    What is meant by 'carryover or exchanged basis' when Section 351 applies?

    <p>The basis in the stock received reflects the adjusted basis of the property transferred</p> Signup and view all the answers

    Under what condition would a corporation recognize a gain from issuing its own shares?

    <p>If shares are issued for property with a basis less than its value</p> Signup and view all the answers

    Which of the following best describes the holding period for shares issued for cash?

    <p>Holding period starts when cash is contributed</p> Signup and view all the answers

    What is the significance of 'control' as defined in Section 351?

    <p>At least 80% of the total combined voting power of stock</p> Signup and view all the answers

    What is the corporate treatment of cash received for shares issued during formation?

    <p>Considered as a cash purchase for all intents</p> Signup and view all the answers

    How is the holding period of stock determined in a corporate formation scenario?

    <p>It includes the period during which the property transferred was held if it's a capital or 1231 asset.</p> Signup and view all the answers

    What does Section 1032 state regarding the issuance of stock by a corporation?

    <p>Corporations do not recognize gain or loss on the issuance of their own stock.</p> Signup and view all the answers

    What happens to the basis of property received by the corporation from the shareholder?

    <p>The corporation takes the same basis the property had in the hands of the shareholder.</p> Signup and view all the answers

    What limitation does Section 351 impose regarding capital contributions involving loss property?

    <p>The adjusted basis of loss property exceeds its fair market value at transfer.</p> Signup and view all the answers

    In a situation where properties with built-in losses are transferred, how is the corporation's basis determined?

    <p>Each property is treated individually for basis purposes.</p> Signup and view all the answers

    How does the concept of 'tacked' holding period influence a corporation's basis?

    <p>It provides the corporation with a carryover holding period from the transferor.</p> Signup and view all the answers

    Which situation leads to a duplicated gain in the context of corporate formations?

    <p>When a shareholder recognizes a gain on the transfer of appreciated property.</p> Signup and view all the answers

    What is a consequence when a corporation receives property with a net built-in loss?

    <p>The corporation’s basis in the property is limited to the property's fair market value.</p> Signup and view all the answers

    Study Notes

    Corporate Formation: Section 351

    • Shareholder Holding Period: The shareholder's holding period of stock includes the period during which the transferred property was held if the property is a capital asset or a 1231 asset. Otherwise, the holding period begins on the day of the transfer.
    • Corporation's Non-Recognition of Gain or Loss: A corporation does not recognize gain or loss on the issuance of its own stock.
    • Carryover Basis: The corporation steps into the shoes of the shareholder for basis purposes, meaning the property received from the shareholder has the same basis inside the corporation as it had in the hands of the taxpayer.
    • Carryover Holding Period: The corporation receives a "tacked" holding period, meaning it carries over the basis and holding period from the shareholder.
    • Limitations to Section 351:
      • Contributions of Loss Property:
        • Duplicated Gain: If property with a built-in loss is transferred, the corporation's adjusted basis is limited to the fair market value of the property at the time of transfer.
        • Basis Reduction Allocation: Basis reduction is allocated on a transferor-by-transferor basis if multiple loss properties are contributed.
      • Transferred Property with a Net Built-in Loss:
        • Net Built-in Loss: A net built-in loss occurs when the aggregate adjusted basis of the property transferred exceeds its fair market value.
        • Gain Recognition: Any gain recognized on the transfer is considered when determining the net built-in loss.
        • Multiple Properties: Multiple properties contributed by the same transferor are aggregated to determine if there's a net built-in loss.
    • Basis Reduction Election: The shareholder and corporation may jointly elect to reduce the shareholder's basis in the stock they receive to its fair market value, reducing the built-in loss.
    • General Principle of Corporate Formation:
      • Initial Operating Capital: Corporations generally receive initial operating capital through the issuance of stock or borrowing.
      • Cash Received for Shares: This is treated as a cash purchase, with the shareholder's basis in the stock being the amount of cash contributed.
      • Corporation's Basis in Cash: The corporation's basis in cash is the face value.
      • No Gain or Loss on Stock Issuance: Corporations generally do not recognize gain or loss on the issuance of their own shares.
    • Stock Issued in Exchange for Property:
      • Taxable Exchange: Without Section 351, this would be a taxable exchange, with both the shareholder and corporation potentially recognizing gain or loss.
    • Section 351: Tax-Free Transfers:
      • Non-Recognition Provisions: Section 351 generally makes transfers of property for stock tax-free.
      • Policy Reasons: This is considered a mere change in form of ownership or investment, with no real economic change.
    • Section 351 Requirements:
      • Property Transfer: One or more persons must transfer property to the corporation.
      • Sole Exchange for Stock: The transfer must be solely in exchange for the corporation's stock.
      • Control Requirement: The transferor(s), as a group, must be in control of the corporation immediately after the exchange (at least 80% of voting power and 80% of all other classes of stock).
    • Section 351 Results:
      • No Gain or Loss: Shareholder does not recognize gain or loss but receives a "carryover or exchanged basis" in the stock.

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