CHAPTER18REVIEWQUESTIONS

CHAPTER18REVIEWQUESTIONS - CHAPTER 18 CORPORATIONS:...

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CHAPTER 18 CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE TRUE/FALSE 1. The reason for § 351 (which permits transfers to controlled corporations to be tax free) can be justified under the wherewithal to pay concept. ANS: T REF: p. 18-3 2. Similar to like-kind exchanges, the receipt of “boot” under § 351 can cause gain to be recognized. ANS: T Realized gain is recognized to the extent of the boot received. PTS: 1 REF: p. 18-4 3. Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000. ANS: F Section 351 does not permit the recognition of realized losses. PTS: 1 REF: p. 18-4 4. In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder. ANS: F If a shareholder ends up with a realized loss, the receipt of the boot will not cause that loss to be recognized. The receipt of boot will only trigger a realized gain . PTS: 1 REF: p. 18-4 5. In a § 351 transfer, a shareholder who receives boot has a realized loss. None of the boot is taxed. ANS: T If a shareholder ends up with a realized loss, boot does not trigger gain or loss recognition. PTS: 1 REF: p. 18-4 18-1
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18-2 2008 Comprehensive Volume/Test Bank 6. In a § 351 transfer, gain will be recognized to the extent of the greater of realized gain or the boot received. ANS: F It is the lesser of and not the greater of . PTS: 1 REF: p. 18-4 7. Adam transfers inventory with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Heron Corporation. In addition, he receives cash of $30,000. Adam recognizes a capital gain of $30,000 on the transfer. ANS: F Adam recognizes $30,000 of ordinary income. The gain on the transfer is limited to the boot received of $30,000; further, the gain is characterized by reference to the asset transferred. PTS: 1 REF: p. 18-4 8. The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer. ANS: T REF: p. 18-4 9. A secret process and patentable inventory both constitute “property” under § 351. Consequently, neither gain nor loss is recognized on the transfer of such “property” to a controlled corporation. ANS: T REF: p. 18-4 10. The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor. ANS: F Gain would not be recognized. An installment obligation is property under § 351. PTS: 1 REF: p. 18-4 11. Since services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services. ANS: T
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CHAPTER18REVIEWQUESTIONS - CHAPTER 18 CORPORATIONS:...

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