Chap008_rev.12

Chap008_rev.12 - Chapter 08 - Corporate Formation,...

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Unformatted text preview: Chapter 08 - Corporate Formation, Reorganization, and Liquidation Chapter 8 Corporate Formation, Reorganization, and Liquidation SOLUTIONS MANUAL Discussion Questions 1. [LO 1] Discuss the difference between gain realization and gain recognition in a property transaction. Answer: Gain realization occurs when a transaction takes place (that is, there has been an exchange of property rights between two persons) and the “amount realized” exceeds the taxpayer’s tax basis in the property sold or exchanged. Recognition is the recording of the gain realized on a tax return. Before gain or loss is recognized, it first must be realized. 2. [LO 1] What information must a taxpayer gather to determine the amount realized in a property transaction? Answer: A taxpayer must determine the cash and fair market value of property received in the exchange. In addition, a taxpayer must determine if a liability will be assumed on the property received in the exchange or transferred in the exchange. Finally, a taxpayer must determine if selling expenses were incurred in the transaction. The amount realized is the cash plus the fair market value of property received plus any liability assumed by the transferee of property less any liability assumed on property received by the transferor less selling expenses.. 3. [LO 1] Distinguish between exclusion and deferral as it relates to a property transaction. Answer: Gain or loss that is excluded (exempt) from taxation will never be recognized on a tax return. Gain or loss that is deferred may be recognized on a future tax return if circumstances trigger recognition of the gain or loss deferred in the current year. 4. [LO 1] Contrast how a taxpayer’s tax basis in property received in a property transaction will be affected if the transaction results in gain exclusion versus gain deferral. Answer: In an exclusion transaction, the taxpayer’s tax basis in the property received will be its fair market value. In a deferral transaction, the taxpayer’s tax basis in the property received will be its fair market value less the gain deferred. 8-1 Chapter 08 - Corporate Formation, Reorganization, and Liquidation 5. [LO 1] What information must a taxpayer gather to determine the tax-adjusted basis of property exchanged in a property transaction? Answer: A taxpayer must determine the acquisition basis of the property. In a purchase, this will be cost, but it could be fair market value if received as a bequest or carryover basis if received as a gift. A taxpayer also must determine if depreciation or amortization has been subtracted from the acquisition basis or if capital improvements have been added to the acquisition basis. 6. [LO 2] Why does Congress allow tax deferral on the formation of a corporation?...
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This note was uploaded on 03/25/2012 for the course TAX 3011 taught by Professor Jones during the Spring '12 term at UNF.

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Chap008_rev.12 - Chapter 08 - Corporate Formation,...

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