Corporation and Fair Market Value

Topics: Corporation, Sole proprietorship, Stock market Pages: 5 (910 words) Published: June 19, 2013
1. Sadie incorporates her sole proprietorship with assets having a fair market value of $80,000 and an adjusted basis of $100,000. Even though § 351 applies, Sadie may recognize her realized loss of $20,000.

F
True

False

2. For § 351 purposes, stock warrants are included in the definition of "stock."

F
True

False

3. In order to retain the services of Paige, a key employee in Byron's sole proprietorship, Byron contracts with Paige to make her a 30% owner. Byron incorporates the business receiving in return 100% of the stock. Three days later, Byron transfers 30% of the stock to Paige. Under these circumstances, § 351 will apply to the incorporation of Byron's business.

F
True

False

4. A person who performs services for a corporation in exchange for stock will be treated as a member of the transferring group even if that person only transfers a relatively small amount of property to the corporation.
F

True

False

5. When a taxpayer incorporates her business, she transfers several liabilities to the corporation. If one of the liabilities is personal in origin, only that liability will be treated as boot.

F; personal AND BUSINESS PURPOSES

True

False

6. Matthew and Gabriella form Epsilon Corporation. Matthew transfers property (basis of $50,000 and fair market value of $40,000) while Gabriella transfers land (basis of $25,000 and fair market value of $30,000) and $10,000 in cash. Each receives 50% of Epsilon Corporation's stock, which is worth a total of $80,000. As a result of these transfers:

D;Matt FMV = 40’ Paid/basis= 50, Built in loss
Gabriella, FMV=30, basis=25, cash 10
They are giving in, NOTHING is coming back (not even the 10)
A. Matthew has no recognized loss, but Gabriella a recognized gain of $10,000
B. Epsilon Corporation will have a basis in the land of $30,000
C. Matthew has a recognized loss of $10,000, and Gabriella has a recognized gain of $15,000
D. Neither Matthew nor Gabriella has any recognized gain or loss.

7. Cadence transfers property worth $500,000, basis of $100,000, to Alpha Corporation for 80% of the stock in Alpha, worth $400,000, and a long-term note, executed by Alpha Corporation and made payable to Cadence, worth $100,000.

C;
Another 351 (transfer of property), notes payables is a boot!
A. Cadence recognizes a gain of $400,000 on the transfer
B. Cadence recognizes no gain on the transfer

C. Cadence recognizes a gain of $100,000 on the transfer.
D. Cadence recognizes a gain of $300,000 on the transfer

8. Willa transferred land worth $400,000, with a tax basis of $100,000, to Zeta Corporation, an existing entity, for 600 shares of its stock. Zeta Corporation has two other shareholders, Jasper and Jonah, each of whom holds 100 shares. With respect to the transfer:

A;
Potential problems for existing entity under 351 – potential holders! 600 stocks coming back, 2 share holders 100 stocks each
After 351, how many shares are outstanding=800
Willa gets 600, is that 80%=no
351 will not work, this is a taxable transaction!
Thus the COST BASIS is recognized as a gain and the stocks too!

If 351 worked, C would have been true!

A. Willa has a basis of $400,000 in her 600 shares in Zeta Corporation
B. Jasper and Jonah both recognize gain on the transfer.
C. Zeta Corporation has a basis of $100,000 in the land
D. Willa has no recognized gain

9. Mackenzie incorporates her sole proprietorship, transferring it to newly formed Omega Corporation. The assets transferred have an adjusted basis of $300,000 and a fair market value of $400,000. Also transferred was $50,000 in liabilities, $5,000 of which was personal and the balance of...
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