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Unformatted text preview: 19-1Chapter 19 Corporate Formation, Reorganization, and LiquidationChapter 19Corporate Formation, Reorganization, and LiquidationSOLUTIONS MANUALDiscussion Questions1. [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 taxpayers 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.3. [LO 1] Distinguish between exemption and deferral as it relates to a property transaction.Answer:Gain or loss that is exempt from taxation will never be recorded on a tax return. Gain or loss that is deferred may appear on a future tax return if circumstances trigger recognition of the gain or loss deferred in the current year.10. [LO 2] True or False? The receipt of boot by the shareholder in a 351 transaction causes the transaction to be fully taxable. Explain.Answer:False. Boot taints an otherwise tax-deferred transaction under 351. A shareholder who receives boot in the transferee corporation recognizes gain (but not loss) in an amount not to exceed the lesser of 1) gain realized or 2) the fair market value of the boot received.11. [LO 2] True or False? A corporations assumption of shareholder liabilities will always constitute boot in a 351 transaction. Explain.Answer:False. Under the general rule, the corporations assumption of a shareholders liability attached to property transferred (for example, a mortgage attached to the building and land) is not treated as boot received by the shareholder. Congress created two exceptions in which liability assumption by the corporation is treated as boot:1.Under the first exception, if any of the liabilities assumed by the corporation are assumed with the purpose of avoiding the federal income tax or if there is no corporate business purpose for the assumption, all of the liabilities assumed are treated as boot to the shareholder.19-2Chapter 19 Corporate Formation, Reorganization, and Liquidation2.Under the second exception, if a shareholders liabilities assumed are in excess of the aggregate tax basis of the properties transferred by the shareholder, gain is recognized to the extent of the excess. Liabilities, the payment of which would give rise to a deduction, are not treated as liabilities in making this determination.14. [LO 2] Under what circumstances does property received by a corporation in a 351 transaction not receive a carryover basis? What is the reason for this rule?...
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- Spring '11