SU 13: Corporate Formation

Pietro transfers property worth $50,000 to Vino, Inc., and also provides personal services worth $5,000 in exchange for stock valued at $55,000. Immediately after the exchange, Pietro owns 90% of Vino's outstanding stock. What is Pietro's income recognition, if any? $0 capital gain, $5,000 ordinary income. $5,000 capital gain, $0 ordinary income. $55,000 capital gain, $0 ordinary income. $0 capital gain, $50,000 ordinary income.

$0 capital gain, $5,000 ordinary income.

Adams, Beck, and Carr organized Flexo Corp. with authorized voting common stock of $100,000. Adams received 10% of the capital stock in payment for the organizational services that he rendered for the benefit of the newly formed corporation. Adams did not contribute property to Flexo and was under no obligation to be paid by Beck or Carr. Beck and Carr transferred property in exchange for stock as follows: Adjusted Basis-Fair Market Value-Percentage of Flexo Stock Acquired Beck-$ 5,000-$20,000-20% Carr$60,000-$70,000-70% What amount of gain did Carr recognize from this transaction? $15,000 $0 $10,000 $40,000

$0.

In a Sec. 351 transaction, Mr. Miller transferred assets with an adjusted basis of $76,000 and a fair market value of $80,000 to Way View Corporation in exchange for its capital stock with a fair market value of $72,000. What is Mr. Miller's recognized gain or loss? $(8,000) $0 $(4,000) $4,000

$0.

Wilson exchanged his land, which has a fair market value of $45,000 and an adjusted basis of $35,000, for 80% of the stock of Weston Corporation. The stock has a fair market value of $70,000. Wilson also received land with an adjusted basis of $15,000 to Weston and a fair market value of $22,000. Each piece of land is for productive use at Weston. What is the amount of Wilson's recognized gain on this transaction? $57,000 $70,000 $35,000 $0

$0.

Mr. A owned 75% of the voting stock and 85% of the nonvoting stock of Corporation Y. Mr. A transferred property with a fair market value of $90,000 and an adjusted basis of $70,000 to Y for an additional 5% of the voting stock and 5% of the nonvoting stock. What is the amount of gain to be recognized by Mr. A? $10,000 $8,000 $20,000 $0

$0. 75%+5%= 80% of the voting stock, so they qualify as controlling the corp.

Roland owns a 60% interest in Kramer Partnership and an 80% interest in Burns Partnership. In February 2020, Kramer sold land to Burns for $80,000. The land had a basis to Kramer of $90,000. In July 2021, Burns sold the land to Wilson, an unrelated individual, for $84,000. What is the amount of gain (loss) that Burns Partnership should recognize in 2021? $(10,000) $4,000 $0 $(6,000)

$0. 80,000-90,000= 10,000 unrealized gain. 84,000-80,000 basis= 4,000 gain-10,000= 6,000 unrealized gain.

Joyce and Edward combine their sole proprietorships by forming the Lair Corporation. Joyce transfers land and a building having a combined $50,000 adjusted basis and a $100,000 FMV to the corporation in exchange for 40% of the Lair Corporation stock. Edward transfers equipment with a $60,000 adjusted basis and a $150,000 FMV to the corporation in exchange for 60% of the Lair stock with a par value of $10. Joyce and Edward received no other property then the Lair stock. What is Edward's recognized gain on this transaction? $60,000 $0 $150,000 $90,000

$0. After the exchange, Joyce and Edward combined have total control over the Corp., so no gain is recognized.

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? $200,000 loss $0 $25,000 loss $325,000 loss

$0. Can't recognize the $25,000 loss as he owns more than 50% of the corp.'s stock, and as a result, he cannot recognize any losses on an exchange of the property for the corp's stock or other property.

On January 31, 2021, Lenny sold an apartment building for $217,500. He had purchased the building on February 1, 2020, for $192,500. The depreciation deducted as of January 31, 2021, was $7,000. What amount may Lenny treat as a Sec. 1231 gain? $217,500 $7,000 $0 $32,000

$0. Held less than a year, so no 1231 gain.

Sam and Allen organized Pace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows: Property-Basis-Adjusted Fair Market Value-Percentage of Pace Stock Acquired Sam-Building-$40,000-$72,000-60% Allen-Land-$5,000-$48,000-40% What amount of gain did Sam recognize on the exchange? $19,200 $32,000 $72,000 $0

$0. No gain realized as it was only for stock, and they were in control of the corporation.

Price Corporation has common stock with a par value of $25 per share. Price entered into an exchange whereby the company gave up stock worth $350,000 and received land with a fair market value of $350,000 and an adjusted basis to the transferor of $100,000. At the time of the exchange, Price common stock was selling for $35 per share. The gain that Price must recognize as a result of the exchange is $250,000 $350,000 $0 $100,000

$0. No gain/loss recognized by a Corp. on the receipt of money or other property in exchange for stock.

A taxpayer acquired a rental house several years ago for $190,000. The taxpayer sold his rental house for $190,000 in May 2021. Under an accelerated method, the taxpayer's depreciation would have been $67,840. Under the S-L method, the taxpayer's depreciation is $64,960. How much Sec. 1250 gain did this taxpayer have classified as ordinary income when the house was sold? $2,880 $67,840 $0 $64,960

$0. Recapture of residential rental income as ordinary income is not required as it was acquired after 1986 and not depr. under the S-L method.

Mr. Carroll transferred the title of a condo he owned in Mexico to his 100%-owned accounting corporation in exchange for stock worth $5,000. Carroll used the condo for personal purposes, and he had no bona fide business reason for the transfer. At the time of the transfer, the condo had a fair market value of $170,000, an adjusted basis of $160,000, and a mortgage of $165,000 (which was assumed by the corporation). What is the amount of Mr. Carroll's recognized gain? $10,000 $165,000 $5,000 $0

$10,000. 170,000 amount realized-160,000 basis.

Mrs. O'Dell transferred property that had an adjusted basis to her of $20,000 and a FMV of $50,000, to Sinex Corporation in exchange for 100% of Sinex Corporation's only class of stock, $5,000 cash, and office furniture worth $5,000. At the time of the transfer the stock had a FMV of $40,000. What amount of gain must Mrs. O'Dell recognize? $10,000 $50,000 $30,000 $0

$10,000. 40,000+5,000+5,000= 50,000 total received. 50,000-20,000= realized gain. However, the recognized gain is limited to the amount of cash and property received, 10,000.

Jake transferred land having an adjusted basis of $35,000 and a fair market value of $47,000 to Otter Corporation. In exchange for the land, he received $5,000 cash, equipment having an adjusted basis of $3,000 and a fair market value of $5,000, and 80% of Otter Corporation's only class of stock outstanding. The stock received by Jake had a fair market value of $37,000. What is the amount of gain that Jake will recognize? $12,000 $0 $10,000 $20,000

$10,000. Boot is the lesser than the boot received/gain realized, so 5,000 cash+5,000 equipment= 10,000.

Mr. Carroll transferred the title of a condo he owned in Mexico to his 100%-owned accounting corporation in exchange for stock worth $5,000. Carroll used the condo for personal purposes, and he had no bona fide business reason for the transfer. At the time of the transfer, the condo had a fair market value of $170,000, an adjusted basis of $160,000, and a mortgage of $165,000 (which was assumed by the corporation). What is the amount of Mr. Carroll's recognized gain? $165,000 $10,000 $5,000 $0

$10,000. Mr. Carroll's recognized gain is $10,000 ($170,000 amount realized - $160,000 basis).

Mary owns a farm with a FMV of $500,000 and a mortgage of $200,000. The basis of the farm is $300,000. She exchanged the farm for stock in a transfer under IRC Sec. 351. What is her basis in the new stock? $500,000 $700,000 $300,000 $100,000

$100,000. 300,000 basis-200,000 mortgage= 100,000 basis of the new stock.

Jack Carson transferred a building that had an adjusted basis of $75,000 and a fair market value of $130,000 to Corporation R in exchange for 80% of R's only class of stock and a car with an adjusted basis to R of $25,000. The fair market value of the stock at the time of the transfer was $100,000 and the car's fair market value was $30,000. What is the amount of R's basis in the building? $100,000 $105,000 $75,000 $130,000

$105,000. 100,000 FMV of stock+30,000 FMV car-75,000 AB in the building= 55,000 realized gain. Only the 30,000 of the gain is recognized as it was the FMV of the property that wasn't stock. Thus, the basis is 75,000+30,000= 105,000.

Clark and Hunt organized Jet Corp. with authorized voting common stock of $400,000. Clark contributed $60,000 cash. Both Clark and Hunt transferred other property in exchange for Jet stock as follows: Other Property Adjusted Basis-Fair Market Value-Percentage of Jet Stock Acquired Clark $50,000-$100,000-40% Hunt $120,000-$240,000-60% What was Clark's basis in Jet stock? $0 $100,000 $110,000 $160,000

$110,000. 60,000 cash+50,000 adj basis of property= 110,000.

Ms. White transferred property having an adjusted basis of $145,000 and a fair market value of $160,000 to Corporation T in exchange for 100% of T's only class of stock and $20,000 cash. At the time of the transfer, the stock had a fair market value of $115,000. What is the basis of the stock Ms. White received in this transaction? $115,000 $145,000 $125,000 $160,000

$125,000. 115,000-20,000-145,000= 10,000 realized loss. Loss is not recognized, so the basis is the 145,000 adj basis of property transferred- 20,000 boot received= 125,000.

James bought and placed in service computer equipment in 2021. He paid $15,000 cash and received a $3,000 trade-in allowance for his old computer equipment. James had an adjusted basis of $4,000 in the old computer equipment. He used both the old and new computer equipment 90% for business and 10% for personal purposes. His allowable Sec. 179 expense deduction is $15,000 $13,500 $16,200 $17,100

$13,500. 15,000x90%= 13,500.

In exchange for Buc Corporation stock, Trent performed legal services for Buc valued at $14,000 and paid Buc $36,000 cash. The stock received by Trent had a fair market value at the time of the exchange of $50,000. What is the amount of Trent's recognized gain from this exchange? $36,000 $14,000 $0 $50,000

$14,000.

For bona fide business purposes, Mr. D transferred the following property to Corporation X. X assumed the $50,000 mortgage. Asset Basis-Mortgage-Fair Market Value Building and land $120,000-$50,000-$160,000 Various equipment $60,000-$0-$40,000 In the exchange, Mr. D received 100% of X's only class of stock. What is Corporation X's basis in the property received in the exchange? $130,000 $150,000 $180,000 $200,000

$180,000. More than 80% control of the Corp. Section 357(c) would not cause any recognition of gain on the contribution of the mortgage since the liability ($50,000) did not exceed the adjusted basis of all property transferred ($180,000). The basis of the property received by Corporation X is therefore the adjusted basis of the property in the hands of the shareholder, which was $180,000 ($120,000 building and land + $60,000 various equipment).

Kim transferred property with an adjusted basis of $16,000 and a fair market value of $25,000 to Corporation K, in exchange for 90% of K's only class of stock and $3,000 cash. The stock received by Kim had a fair market value of $22,000 at the time of the exchange. What is Corporation K's basis in the property received from Kim? $22,000 $19,000 $25,000 $16,000

$19,000. 16,000+3,000= 19,000.

Mr. Kahr transferred property with an adjusted basis of $17,500 and a fair market value of $21,500 to Corporation G. In exchange, Mr. Kahr received $2,000 cash and 85% of Corporation G's only class of stock. The stock received by Kahr had a fair market value of $19,500. What is Corporation G's basis in the property received in this exchange? $21,500 $19,500 $0 $17,500

$19,500. 19,500-17,500= 2,000 gain realized by Mr. Kahr. 17,500+2,000= 19,500.

Mr. White transferred an office building to Corporation Q in exchange for 100% of Corporation Q's stock. The office building had an adjusted basis of $100,000 and a fair market value of $300,000. The building was subject to a mortgage of $120,000, which Corporation Q assumed for valid business reasons. The fair market value of Corporation Q's stock on the date of the transfer was $60,000. What is Mr. White's recognized gain? $0 $20,000 $60,000 $120,000

$20,000. 100,000-120,000= 20,000 gain on sale.

In an exchange transaction, Jesse Jenkins transferred land worth $50,000 to his 80%-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 $35,000 $10,000 $20,000 $30,000

$20,000. 20,000+20,000+10,000= 50,000-15,000= 35,000 gain realized. Gain recognized is 20,000, limited to cash received.

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? $0 $20,000 $170,000 $350,000

$20,000. Sec. 357(c) provides that, if the liabilities transferred or assumed ($200,000) are greater than the basis of all the property transferred ($180,000), the excess is treated as a gain from the sale or exchange of property. Thus, Andrew's recognized gain is $20,000.

Tony recently acquired a 40% share in Walden Corporation. The value of the stock is $65,000. He received the shares in return for both a property and financial services he provided to Walden. These financial services were valued at $25,000. The fair market value and adjusted basis of the property to Tony is $40,000. What amount should Tony recognize as income on the exchange? $65,000 $10,000 $25,000 $40,000

$25,000. This is for services only.

Walter is a limited partner in Cat Partnership. He contributed $30,000 in cash on the formation of the partnership. His adjusted basis in the partnership is $40,000, which includes his share of partnership liabilities of $10,000. In the current year, Walter sold his interest in the partnership for $60,000 in cash. He had been paid his share of partnership income for the tax year. The partnership has no other liabilities or receivables or inventory. What is the amount and character of Walter's gain? $20,000 capital gain. $20,000 ordinary gain. $30,000 capital gain. $30,000 ordinary gain.

$30,000 capital gain. 60,000+10,000-40,000= 30,000 capital gain.

Ms. K transferred property with an adjusted basis of $25,000 and a fair market value of $30,000 to Corporation P in exchange for 50% of Corporation P's only class of stock. At the time of the transfer, the stock Ms. K received had a fair market value of $30,000. What is Corporation P's basis in the property received in this exchange? $25,000 $0 $12,500 $30,000

$30,000.

Mr. B transferred property having an adjusted basis of $105,000 and a fair market value of $141,000 to Corporation F. In exchange for the property, he received $15,000 cash, equipment having an adjusted basis of $9,000 and a fair market value of $15,000, and 80% of Corporation F's only class of stock. The stock received by Mr. B had a fair market value of $111,000. What is the amount of gain that Mr. B will recognize? $60,000 $30,000 $36,000 $0

$30,000. 15,000 cash+15,000 equipment= 30,000.

Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows: Property-Basis-Adjusted Fair Market Value-Percentage of Ace Stock Acquired Lind-Building-$40,000-$82,000-60% Post-Land-$5,000-$48,000-40% The building was subject to a $10,000 mortgage that was assumed by Ace. What is Lind's basis in Ace stock? $30,000 $82,000 $0 $40,000

$30,000. 40,000-10,000 liabilities assumed= 30,000 basis.

Stone, a cash-basis taxpayer, incorporated her CPA practice. No liabilities were transferred. The following assets were transferred to the corporation: Cash (checking account) $ 500 Computer equipment Adjusted basis $30,000 Fair market value $34,000 Cost $40,000 Immediately after the transfer, Stone owned 100% of the corporation's stock. The corporation's total basis for the transferred assets is $40,500 $34,500 $30,000 $30,500

$30,500. 30,000+500= 30,500.

On July 1 of the current year, Mel leased property for 2 years for $700 a month. On September 30 of the current year, the owner of the property told him if he paid the total in advance for the remainder of the lease the rent would be reduced to $675 a month. Mel accepted his offer and on October 1 of the current year, he paid the owner $14,175. How much can Mel deduct as rental expense in the current year? $2,025 $4,050 $16,300 $4,125

$4,125. 700x3(July, Aug., and Sept.)+675x3(Oct., Nov., and Dec.)= 4,125.

Under a partnership agreement, Gary is to receive 25% of the partnership income, but not less than $12,000. At the end of Year 1, the partnership had net income of $30,000. What is the amount the partnership can deduct as a guaranteed payment in Year 1? $3,000 $7,500 $4,500 $12,000

$4,500. 12,000-(30,000x25%)= 4,500.

During the current year, Dr. Unsa, a self-employed canine biologist specializing in fila dogs, attended a convention in Brazil concerning the feeding and mating habits of fila dogs. The convention was beneficial to his business since it was held in an area renowned for its abundance of fila dogs. Also, the foremost fila dog authorities in the world live there. He spent 7 full days attending the convention and 3 days sightseeing. He incurred expenses of $4,000 for airfare, $2,000 for lodging, and $1,000 for meals. The meals were not provided by restaurants. How much may Dr. Unsa deduct for the trip on his Schedule C for the current year? $3,500 $4,550 $6,500 $0

$4,550. 4,000x70%+2,000x70%+1,000x50%x70%= 4,550.

Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows: Property-Basis-Adjusted Fair Market Value-Percentage of Ace Stock Acquired Lind-Building-$40,000-$82,000-60% Post-Land-$5,000-$48,000-40% The building was subject to a $10,000 mortgage that was assumed by Ace. What is Ace's basis in the building? $40,000 $82,000 $30,000 $72,000

$40,000.

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? $35,000 $45,000 $40,000 $85,000

$40,000. 40,000-35,000 total basis of assets= 5,000 gain recognized by Mr. L. 35,000+5,000= 40,000 basis for Corp. K.

Mr. Garza transferred property with an adjusted basis of $37,000 and a fair market value of $50,000 to Corporation K. In exchange, Mr. Garza received $6,000 cash and 90% of Corporation K's only class of stock. The stock received by Garza had a fair market value of $40,000. What is Corporation K's basis in the property received in this exchange? $50,000 $43,000 $40,000 $37,000

$43,000. Here, the transfer qualifies as a Sec. 351 transaction since greater than 80% of all stock was held by the shareholder after the exchange. Mr. Garza received $6,000 cash in addition to the stock. Mr. Garza recognizes a gain on the $6,000 received. Thus, Corporation K's basis in the property is $43,000 ($37,000 Mr. Garza's adjusted basis + $6,000 gain recognized by Mr. Garza).

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? $44,000 $9,000 $0 $35,000

$44,000.

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? $0 $40,000 $45,000 $35,000

$45,000.

Ryan runs a manufacturing business employing several people with young children. These employees require daycare as both parents work. He decided that, in order to make it easier for his employees to come to work each day, he would allocate some of the unused space in his manufacturing facility to a childcare facility. In 2021, he incurred $20,000 in qualified childcare facility expenditures. He had no qualified childcare resource and referral expenditures and had no pass-through credits. What is Ryan's credit for 2021? $10,000 $2,000 $5,000 $20,000

$5,000. 20,000x25%= 5,000

John was one of five incorporators of Builders, Inc. Each received stock valued at $100,000. The other four shareholders each contributed $100,000 for their stock. John contributed $50,000 and his services to build the corporate headquarters. He valued his services at $50,000. How much income must John recognize on this transaction? -$100,000 of ordinary income. -$50,000 of ordinary income and $50,000 of capital gain income. -No income recognition. -$50,000 of ordinary income.

$50,000 of ordinary income.

Fran transfers real property and a mortgage to a corporation in exchange for stock. Fran is in control of the corporation immediately after the transfer. The real property has a fair market value of $500,000, and the mortgage transferred to the corporation is $350,000. Fran has an adjusted basis in the real property of $300,000. What is the amount of income required to be recognized by Fran, if any? $350,000 $550,000 $50,000 $0

$50,000. 350,000-300,000= 50,000 recognized gain.

Mr. K performed legal services valued at $6,000 and paid $11,000 to ABC, Inc., in exchange for stock of ABC, Inc., having a fair market value of $17,000. What is the amount of ordinary income, if any, Mr. K must recognize? $11,000 $6,000 $0 $17,000

$6,000.

Ms. D transferred property having an adjusted basis to her of $20,000 and a fair market value of $27,000 to Corporation F. In exchange for the property, she received $6,000 cash and 100% of Corporation F's only class of stock. If the stock received by Ms. D had a fair market value of $21,000 at the time of the transfer, what is the amount of her recognized gain? $0 $6,000 $7,000 $21,000

$6,000.

Mr. Jacobs transferred an office building to Booda Corporation in exchange for 100% of Booda's only class of outstanding stock and $60,000 cash. The building had an adjusted basis of $300,000 and a fair market value of $500,000. The building was subject to a mortgage of $240,000, which Booda assumed for valid business reasons. The fair market value of Booda's stock on the date of transfer was $200,000. What is the amount of Mr. Jacobs's recognized gain? $140,000 $0 $200,000 $60,000

$60,000.

Ms. R transferred property with an adjusted basis of $60,000 and a fair market value of $55,000 to Rain Corporation. She received in exchange 60% of Rain Corporation's only class of stock. At the time of the transfer, the stock Ms. R received had a fair market value of $65,000. What is Rain Corporation's basis in the property after the exchange? $0 $55,000 $65,000 $60,000

$65,000.

In exchange for Thunder Corporation stock, Sydney performed legal services for Thunder valued at $7,000 and paid Thunder $18,000 cash. The stock received by Sydney had a fair market value at the time of the exchange of $25,000. What is the amount recognized on Sydney's tax return from this exchange? $0 $7,000 $25,000 $18,000

$7,000. 25,000-18,000= 7,000.

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? $5,000 $8,000 $0 $15,000

$8,000. 35,000+10,000+5,000-42,000= 8,000 realized gain. Boot realized is 15,000(10,000+5,000). So, the Realized gain is recognized.

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? $8,500 $7,000 $7,500 $6,000

$8,500. 1,000+1,500+6,000= 8,500.

The Norton Manufacturing Corporation was organized on July 1 of the current year. The following expenses were incurred and paid in the period from July to December of the current year: Fee paid to State of Kansas for incorporation $ 1,000 Cost of organizational meetings 3,000 Printing cost of stock certificates 12,000 Legal fees related to drafting the corporate charter 20,000 Assuming that the corporation commences business on July 11 and elects to amortize organizational expenses over the shortest period allowed by law and that it is a calendar-year taxpayer, Norton's current-year deduction for organizational expenditures is $1,200 $2,400 $800 $1,600

$800. 1,000+3,000+20,000= 24,000x(6/180 months)= 800.

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? $0 $93,500 $76,500 $85,000

$93,500. Stock issued for services falls outside of the general rule for Sec. 351.

Allen contributes machinery and real property to Jack Corporation that has been in existence for several years as follows: Asset-Adjusted Basis-Fair Market Value Machinery-$100,000-$150,000 Real property-$500,000-$550,000 Jack Corporation has two classes of stock-one with voting rights and one without voting rights. In exchange for the machinery and real property, Allen receives stock with a fair market value of $700,000. Immediately after the transfer, Allen owns 75% of the outstanding shares of corporate stock with voting power and 80% of the outstanding shares of each class of nonvoting stock of the corporation. Which of the following statements is true? -$100,000 gain is recognized by Allen. -$100,000 loss is recognized by the corporation. -No gain is recognized by Allen. -$100,000 gain is recognized by Allen and the corporation will recognize a loss in the amount of $100,000.

-$100,000 gain is recognized by Allen.

You transfer property with an adjusted basis of $20,000 and a fair market value of $31,000 in exchange for 100% of the stock in a new corporation. You receive 100 shares of stock having a fair market value of $16,000 and $10,000 in cash. The corporation also assumes a $5,000 mortgage on the property. Which of the following is true? -$11,000 gain realized; $0 recognized. -$11,000 gain realized; $10,000 recognized. -$15,000 gain realized: $11,000 recognized. -$10,000 gain realized; $5,000 recognized.

-$11,000 gain realized; $10,000 recognized.

During the year, Yasmine transferred land with an adjusted basis of $40,000 and a fair market value of $95,000 to Nadir Corporation in exchange for 100% of Nadir Corporation's only class of stock. The land was subject to a liability of $45,000, which Nadir Corporation assumed. The fair market value of Nadir Corporation's stock at the time of the transfer was $50,000. What amount of gain must Yasmine recognize and what is her basis in the Nadir Corporation stock? -$0 recognized gain, $40,000 basis. -$55,000 recognized gain, $95,000 basis. -$5,000 recognized gain, $0 basis. -$5,000 recognized gain, $45,000 basis.

-$5,000 recognized gain, $0 basis. Gain is recognized for the excess of liabilities over basis so that there is not a negative basis in the stock [$5,000 recognized gain ($45,000 liabilities - $40,000 basis)]. The stock basis is zero. The basis of the asset to the corporation is $45,000.

John was one of five incorporators of Builders, Inc. Each received stock valued at $100,000. The other four shareholders each contributed $100,000 for their stock. John contributed $50,000 and his services to build the corporate headquarters. He valued his services at $50,000. How much income must John recognize on this transaction? -$50,000 of ordinary income. -No income recognition. -$50,000 of ordinary income and $50,000 of capital gain income. -$100,000 of ordinary income

-$50,000 of ordinary income.

Jones incorporated a sole proprietorship by exchanging all the proprietorship's assets for the stock of Nu Co., a new corporation. To qualify for tax-free incorporation, Jones must be in control of Nu immediately after the exchange. What percentage of Nu's stock must Jones own to qualify as "control" for this purpose? -51.00% -66.67% -80.00% -50.00%

-80.00%

On July 1, Alan Rees, sole proprietor of Kee Nail, transferred all of Kee's assets to Merit, Inc., a new corporation, in exchange for some of Merit's stock. Al Clyde, who is not related to Rees, also bought some of Merit's stock on July 1. Merit's outstanding capital stock consisted of 1,000 shares of common stock with a par value of $100 per share. For the transfer of Kee Nail's assets to be tax-free, what is the minimum number of shares of Merit's stock that must be owned by Rees and Clyde immediately after the exchange? -801. -500. -501. -800.

-800.

On August 15 of last year, the ABC Partnership purchased telephone equipment for $10,000. The equipment is 5-year property under the MACRS rules. Depreciation in the amount of $2,000 was claimed by ABC on the equipment last year. On April 1 of the current year, ABC Partnership was incorporated with its assets being exchanged for King Corporation stock and notes. Gain of $1,000 was recognized on the transfer of the equipment that was purchased last year. What amount of depreciation is claimed by ABC and King on the equipment in the current year? -ABC $800, King $2,400. -ABC $800, King $2,600. -ABC $1,600, King $1,600. -ABC $888, King $2,640.

-ABC $800, King $2,600. King's basis in the property is $8,200 [$7,200 ($10,000 - $2,000 - $800) transferor's adjusted basis + $1,000 gain recognized by ABC on the transfer]. ABC's depreciation deduction is $800 ($10,000 basis × 32% × 3/12). King's depreciation deduction is $2,600 [($10,000 basis × 32% × 9/12) + ($1,000 basis × 20%)]

David Shea transfers real estate with a basis of $40,000 and a FMV of $90,000 to a controlled corporation in return for stock in the corporation. Just before the transfer, David obtains a loan secured by the real estate and uses the $10,000 loan proceeds to buy a new motorcycle. Along with the real estate, the mortgage is transferred to the corporation. Which of the following is true with regard to the tax consequences to David? -Using the proceeds for personal purposes is like the corporation distributing cash, which would be taxed as boot under normal circumstances. -The mortgage assumed by the corporation does not exceed his basis in the property transferred but because this particular liability is considered boot, David has to report a gain. -No bona fide business purpose exists for the corporation to assume David's loan. -All of the answers are correct.

-All of the answers are correct.

Amanda Jones and Calvin Johnson form Quail Corporation during the year by simultaneously making the following transfers: Shareholder-Adjusted Basis of Property Transferred-FMV of Property-Percentage of Stock Received Amanda-$30,000-$60,000-50% Calvin-$70,000-$60,000-50% What is the amount of gain or loss to be reported on these transfers by Amanda and Calvin on their federal income tax returns? -Amanda reports a $30,000 gain, and Calvin reports a $0 loss. -Amanda reports a $0, and Calvin reports a $0 loss. -Amanda reports a $30,000 gain, and Calvin reports a $10,000 loss. -Amanda reports a $0, and Calvin reports a $10,000 loss.

-Amanda reports a $0, and Calvin reports a $0 loss.

The basis of stock received in exchange for property transferred to a controlled corporation is the same as the basis of the property transferred with certain adjustments. All of the following would decrease the basis of the stock EXCEPT -The fair market value of other property received. -Any amount treated as a dividend. -Any money received. -Any loss recognized on the exchange.

-Any amount treated as a dividend.

Bob and Charles, as a group, transfer a building with a basis of $100,000 to the ABC Corporation in exchange for 66.67% of each class of stock with a fair market value of $300,000. The other 33.33% of the stock was already issued to Alice. What is the gain, if any, that Bob, Charles, or the ABC Corporation must recognize? -Bob and Charles, $0; ABC Corporation, $0. -Bob and Charles, $0; ABC Corporation, $300,000. -Bob and Charles, $200,000; ABC Corporation, $0. -Bob and Charles, $0; ABC Corporation, $200,000.

-Bob and Charles, $200,000; ABC Corporation, $0. 300,000 FMV-100,000 adj. basis= 200,000.

Bob and Sam transfer a building with a basis of $100,000 to the Redwood Corporation in exchange for 75% of each class of stock with a fair market value of $300,000. The other 25% of the stock was already issued to Betty. What is the gain, if any, that Bob, Sam, or the Redwood Corporation must recognize? -Bob and Sam, none; Redwood Corporation, $300,000. -Bob and Sam, $200,000; Redwood Corporation, none. -Bob and Sam, none; Redwood Corporation, $200,000. -Bob and Sam, none; Redwood Corporation, none.

-Bob and Sam, $200,000; Redwood Corporation, none. Not 80% control, so 300,000 stock received-$100,000 basis of the building= $200,000.

Bob and Frank buy an apartment building for $100,000. Both Bob and Frank organize the Acme Property Corporation when the apartment building has a fair market value of $500,000. They transfer the building to the corporation for all of its authorized capital stock, which has a par value of $500,000. What is the gain, if any, that Bob, Frank, or the Acme Property Corporation must recognize? -Bob none, Frank none, Acme Property Corporation $500,000. -Bob none, Frank none, Acme Property Corporation none. -Bob $250,000, Frank $250,000, Acme Property Corporation $500,000. -None of the answers are correct.

-Bob none, Frank none, Acme Property Corporation none.

Bob and John make the following transfers to Builders Corporation in return for 100% of the stock in the corporation: Asset and Value Transferred to Builders Asset and Value Transferred to Shareholder Percentage of Stock Received Bob $100,000 cash $10,000 land 80% John $30,000 property (basis of $10,000) $5,000 cash 20% What is the amount of gain Bob and John must recognize on the transfers? -Bob recognizes no gain and John recognizes $5,000 gain. -Bob recognizes $10,000 gain and John recognizes $5,000 gain. -Bob must recognize $10,000 gain and John must recognize $25,000 gain. -Bob recognizes $10,000 gain and John recognizes $20,000 gain.

-Bob recognizes no gain and John recognizes $5,000 gain. John's gain is the 5,000 boot the he received.

Members of a family can be partners. Family members generally will be recognized as partners if -The partnership agreement designates who the partners are, what degree of service they will preform for the partnership, and the extent to which they share in the profits, losses, and other attributes of the partnership. -Capital is not a material income-producting factor, they joined together in good faith for the conduct of a business, they agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. -Capital is a material income-producting factor, they acquired their capital interest in a bona fide transaction, and they actually own the partnership interest but allow the related partner to control the interest. -The partnership agreement states they have a right to share in the profits and earning of the partnership.

-Capital is not a material income-producting factor, they joined together in good faith for the conduct of a business, they agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner.

Tech Corporation was formed by three shareholders: Able, Baker, and Charlie. Charlie agreed to provide all the legal work of organization and incorporation for $5,000 cash and $5,000 worth of stock in Tech Corporation. Which of the following statements regarding the exchange is true? -Charlie will recognize $5,000 in ordinary income. -Charlie will recognize $10,000 in ordinary income. -Charlie will recognize $5,000 ordinary income and $5,000 capital gain. -Charlie will not have to recognize any income because the transfer is nontaxable.

-Charlie will recognize $10,000 in ordinary income.

Frank, an attorney, performed legal services valued at $2,000 for Joey Corporation, a newly formed corporation, in exchange for 1% of the issued and outstanding stock. The fair market value of the shares received was $2,000. Frank would recognize -A ST capital gain of $2,000. -No income until the stock is sold. -Compensation of $2,000. -$2,000 as ordinary income ratably over 60 months.

-Compensation of $2,000.

Mr. Wind transferred property subject to a $35,000 liability to Corporation X in exchange for 90% of X's only class of outstanding stock. Mr. Wind's adjusted basis in the property transferred was $40,000. The fair market value of the stock at the time of the transfer was $60,000. What is Corporation X's basis in the property received, and what is Mr. Wind's basis in the stock received? Corporation X-Mr. Wind -$35,000-$5,000 -$75,000-$75,000 -$40,000-$5,000 -$60,000-$40,000

-Corporation X $40,000-Mr. Wind $5,000. 40,000-35,000= 5,000 Mr. Wind's basis.

In determining whether an activity is engaged in for profit, the relevant facts and circumstances are taken into account. All of the following may indicate you are carrying on the activity for profit EXCEPT -You carry on the activity in a businesslike manner. -You can expect to make a future profit from the appreciation of assets used in the activity. -You depend on income from the activity for your livelihood. -Despite your lack of profitability, you continue to use the same methods of operation to prove that you are serious and the activity is not just a hobby.

-Despite your lack of profitability, you continue to use the same methods of operation to prove that you are serious and the activity is not just a hobby.

Donna exchanges property having an $18,000 adjusted basis and a $35,000 fair market value for 70 shares of the newly created Table Corporation stock. Evelyn exchanges legal services worth $15,000 for the remaining 30 shares of Table Corporation stock. Which of the following is true? -Evelyn must recognize $15,000 of income, and Donna must recognize $17,000 gain on the exchange. -The exchange qualifies as a nontaxable exchange under IRC Sec. 351. -Evelyn recognizes no income, and the exchange is nontaxable. -Evelyn must recognize $15,000 of income, but Donna's transfer of property qualifies under IRC Sec. 351 as nontaxable.

-Evelyn must recognize $15,000 of income, and Donna must recognize $17,000 gain on the exchange. 35,000-18,000= 17,000 gain.

Which of the following factors is NOT taken into account when determining if a gain or loss should be recognized on the transfer of property to a corporation in exchange for a controlling interest in stock of the corporation? -Fair market value of the property transferred to the corporation. -Ownership of at least 80% of the total number of shares of all other classes of stock. -Receipt of money in addition to the stock. -Ownership of at least 80% of the total combined voting power of all stock entitled to vote.

-Fair market value of the property transferred to the corporation.

James acquired a 50% interest in a partnership by contributing property that had an adjusted basis of $10,000 and a fair market value of $25,000. The property was subject to a liability of $22,000, which the partnership assumed for legitimate business purposes. Which of the following statements is correct? -James is required to report a gain on his return, and his basis in his partnership interest is $0. -James is not required to report a gain on his return, but the gain will increase the basis of his partnership interest. -James is not required to report a gain on his return, and his basis in his partnership interest is $0. -James is required to report a gain from the sale or exchange of a capital asset, which will increase his basis in his partnership interest.

-James is required to report a gain on his return, and his basis in his partnership interest is $0.

Joseph Jackson had previously incorporated his sole proprietorship by transferring property to his newly formed corporation in exchange for 100% of the stock. These assets, if sold, would produce a gain of $100,000. A week after incorporation, Joseph sells other assets for cash to the corporation that produce a loss of $20,000. Joseph is attempting to avoid Sec. 351 on the transfer of the loss assets in order to recognize the loss for tax purposes. Which statement best explains the tax consequences to him? -Joseph has a recognized loss of $20,000 to report. -Joseph has a recognized gain of $100,000 and a recognized loss of $20,000 to report. -Joseph has neither a recognized gain nor recognized loss to report. -Joseph has only a recognized gain of $100,000 to report.

-Joseph has neither a recognized gain nor recognized loss to report.

Frank and his son, Kyle, form a corporation with the transfer of property valued at $50,000 and $25,000 respectively. In return for this property, Frank and Kyle each receive 50% of the corporation's stock. Which of the following statements is false regarding the transaction? -Frank will be deemed to have made a gift to his son of $12,500 and Frank's basis in his stock will be the adjusted basis of the property that he transferred to the corporation less the basis of the property deemed to be a gift to Kyle. -A nontaxable exchange has taken place and neither Frank nor Kyle will have a gain on the transfer. -The stock received is not proportionate to the value of the property transferred. -Kyle's basis in his stock will be the adjusted basis of the property that he transferred to the corporation plus the FMV of the property transferred by Frank that is deemed to be a gift to him.

-Kyle's basis in his stock will be the adjusted basis of the property that he transferred to the corporation plus the FMV of the property transferred by Frank that is deemed to be a gift to him.

Mr. Smith and Mr. Jones each transfer property with a basis of $10,000 to a corporation in exchange for stock with a fair market value of $30,000. The total stock received by them represents 75% of each class of stock of the corporation. The other 25% of each class of stock was issued earlier to Mr. Brown, an unrelated person. The taxable consequences are -None because it is transfer of property for stock. -Mr. Smith and Mr. Jones each recognize a gain of $20,000. -Mr. Smith and Mr. Jones each recognize a gain of $30,000. -80% of the transaction is recognized as a taxable gain.

-Mr. Smith and Mr. Jones each recognize a gain of $20,000. Mr. Smith and Mr. Jones combined do not have control over the corporation; therefore, Sec. 351 treatment does not apply. Mr. Smith and Mr. Jones must recognize a gain of $20,000 ($30,000 FMV - $10,000 adjusted basis).

Ned accepted stock in his employer's company valued at $1,000 instead of his $1,000 salary payment. Which tax consequence of this transaction is true? -No income to Ned because stock distributions are not taxable. -This is a nontaxable exchange of property for stock. -No salary expense for is employer because no payment of salary was made. -Ned must recognize $1,000 income because the stock is payment for services.

-Ned must recognize $1,000 income because the stock is payment for services.

Chris and Loretta formed a new corporation and contributed appreciated property. They received 90 and 10 shares of the corporation's stock, respectively. Select the true statement. -Chris and Loretta must recognize gain. -Chris must recognize gain. -Neither Chris nor Loretta must recognize gain. -Loretta must recognize gain.

-Neither Chris nor Loretta must recognize gain.

Fern and Isabella transferred money and a business sailing ship for stock in Courier Corporation. Immediately after the exchange, Fern owned 30% of the voting power and 49% of the total shares of each of the other classes of stock; Isabella owned 55% of the voting power and 36% of the total shares of each of the other classes of stock. Fern and Isabella are not otherwise related. Assuming Fern and Isabella each realized gains on the transaction, which of the following statements would apply? -Only Fern will recognize gain on the exchange. -Only Isabella will recognize gain on the exchange. -Both Fern and Isabella will recognize gains on the exchange. -Neither Fern nor Isabella will recognize gain on the exchange.

-Neither Fern nor Isabella will recognize gain on the exchange.

Mr. Hill and Mr. Dale formed a corporation to which Hill transferred a patent right that had a fair market value to him of $25,000 and a zero adjusted basis. Dale transferred a building that had a fair market value of $100,000 and an adjusted basis to him of $75,000. In return, Hill received 250 shares and Dale 750 shares of the corporation's 1,000 outstanding shares of its only class of stock. As a result of this transaction, Mr. Dale should report -A Sec. 1250 gain of $25,000. -Neither a gain nor a loss. -A capital gain of $25,000. -An ordinary loss of $25,000.

-Neither a gain nor a loss.

Randy and Audra formed a corporation to which Randy transferred equipment that had a fair market value of $25,000 and zero adjusted basis. Audra transferred a building that had a fair market value of $100,000 and an adjusted basis to her of $80,000. In return, Randy received 200 shares and Audra received 800 shares of the corporation's outstanding shares of its only class of stock. As a result of this transaction, Audra should report -Neither a gain or a loss. -A Sec. 1250 gain of $20,000. -A capital gain of $20,000. -An ordinary gain of $20,000.

-Neither a gain or a loss.

Marlene, Nancy, and Olive formed a new corporation. Solely in exchange for stock, Marlene and Nancy contributed appreciated property, while Olive contributed services. The exchanges of Marlene and Nancy will be nontaxable if -Marlene and Nancy receive 50% of the stock. -Olive receives 30% of the stock. -Olive receives 80% of the stock. -Olive receives 10% of the stock.

-Olive receives 10% of the stock. Control is defined by at least 80% ownership of the corporation. Marlene and Nancy need to own at least 80% of the stock for it to be nontaxable.

Robert transferred an office building that has an adjusted basis of $60,000 and a fair market value of $105,000 to the Wargo Corporation in exchange for 100% of Wargo Corporation stock and $10,000 cash. The building was subject to a mortgage of $25,000, which Wargo Corporation assumed. The fair market value of the stock was $75,000. Which of the following are the amounts of Robert's realized gain and recognized gain? -Realized $55,000, Recognized $30,000. -Realized $50,000, Recognized $30,000. -Realized $50,000, Recognized $10,000. -Realized $35,000, Recognized $10,000.

-Realized $50,000, Recognized $10,000. Because money is received in addition to the stock, any gain realized by the shareholder is recognized up to the amount of money received. If the liabilities transferred or assumed do not exceed the basis of all the property transferred, then the liabilities are not recognized as a gain. Thus, Robert's recognized gain is $10,000, the money received from the corporation.

Jenny transferred a factory building with an adjusted basis of $70,000 and a fair market value of $110,000 to the Crystal Corporation in exchange for 100% of Crystal Corporation stock and $20,000 cash. The building was subject to a mortgage of $25,000, which Crystal Corporation assumed. The fair market value of the stock was $75,000. What is the amount of Jenny's realized gain and recognized gain? -Realized $25,000, Recognized $25,000. -Realized $50,000, Recognized $40,000. -Realized $50,000, Recognized $20,000. -Realized $35,000, Recognized $20,000.

-Realized $50,000, Recognized $20,000. Jenny realized a gain of $50,000 on the transfer of property to the controlled corporation ($75,000 stock + $25,000 mortgage assumed + $20,000 cash - $70,000 basis in building). Because money is received in addition to the stock, any gain realized by the shareholder is recognized up to the amount received.

When Susan formed a corporation during the year, she transferred property with a basis of $100,000 to the corporation in exchange for 75% of the stock. The fair market value of the stock she received was $200,000. How should Susan report this transaction on her current year tax return? -Attach a statement reporting the non-taxable exchange. -No reporting required because the exchange is non-taxable. -Report $100,000 taxable gain. -Report $166,667 taxable gain.

-Report $100,000 taxable gain. Susan only received 75% of the stock, so she must recognize 100,000 taxable gain.

Paul, Randy, and Steve form North Corporation by transferring the following properties: Transferor-Asset-Transferor's Adjusted Basis-FMV-Consideration Received Paul-Machinery-$10,000-$12,500-25 shares North stock Randy-Land-$18,000-$25,000-40 shares North stock and $5,000 North note Steve-Cash-$17,500-$17,500-35 shares North stock The 100 shares represent all of the outstanding stock of North Corporation. Using the rules for IRC Sec. 351, which of the following is true? -The exchange qualifies for IRC Sec. 351 and is nontaxable except that Randy must recognize $7,000 of capital gain. -The exchange qualifies for IRC Sec. 351 and is nontaxable except that Randy must recognize $5,000 of ordinary income. -The exchange does not qualify for IRC Sec. 351 nontaxable treatment. -The exchange qualifies for IRC Sec. 351 and is nontaxable except that Randy must recognize $5,000 of capital gain.

-The exchange qualifies for IRC Sec. 351 and is nontaxable except that Randy must recognize $5,000 of capital gain.