CHAPTER 18 SOLUTIONS
END OF CHAPTER QUESTIONS COVERED IN LECTURE – NOT
7, 8, 9, 10, 11, 14, 15, 16, 17, 25, 26, 27, AND 29
7. Is the secret process property for purposes of § 351?
Do the transfers qualify under § 351?
If the transfers qualify under § 351, will Kevin be taxed on the stock received in
exchange for the services he renders to Crow Corporation?
What is Crow’s basis in the secret process if it qualifies as property?
Will Crow Corporation have a tax deduction for the value of the stock it transfers to
Kevin for the services he renders?
Example 3 and related discussion
8. If the real estate is appreciated, either approach results in gain being recognized by
Randall. The receipt of bonds (i.e., securities) results in a sale of the real estate, and the
realized gain is recognized. The mortgage scenario yields a like consequence. One possible
alternative is to use preferred stock. This could give Randall more security than common
stock, particularly if the preferred stock has a liquidation preference. To be nontaxable,
however, the transfer should be tied to the original incorporation of the business. Otherwise,
the 80% control requirement might not be satisfied. In addition, to avoid being considered
boot, the preferred stock received must not meet the definition of nonqualified
preferred stock. pp. 18-5 and 18-9
9. It appears that the exchange qualifies under § 351. Control is not lost if stock received by a
shareholder in a § 351 exchange is sold or given to others who are not parties to the
exchange shortly after the transaction unless there was a binding agreement for such
transfer before the exchange. Assuming the subsequent transfer is completely donative, it
should be disregarded for purposes of the control requirement. Example 7
10. The exchange is taxable to Paul, Mary, and Matt. It does not qualify under § 351
because Matt is not a member of the group transferring property and Paul and Mary
together received only 66
% of the stock. The post-transfer control requirement is not
met. Example 8
a. Ted is attempting to meet the control requirements of § 351. In order to qualify as a
nontaxable exchange under § 351, the person or persons transferring property to a
corporation for stock must own immediately after the transfer, stock possessing 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 of the
corporation. Unless Peggy joins Ted in the transaction, he will not meet the control
requirement and must recognize gain of $80,000 on the transfer.
b. A transferor’s interest cannot be counted if the stock received is of relatively small