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tax problems - questin and answer,.,. ch 18




Question;Ch18 DISCUSSION QUESTIONS1. LO.1 In terms of justification and effect, ? 351 (transfers to a controlled corporation) and ? 1031 (like-kind exchanges) are much alike. Explain.2. LO.1 Under what circumstances will gain and/or loss be recognized on a ? 351 transfer?3. LO.1 What does ?property? include for purposes of ? 351?4. LO.1 Can the receipt of boot ever be taxable in a ? 351 transfer in the absence of realized gain? Explain.5. LO.1 Does the receipt of securities in exchange for the transfer of appreciated property to a controlled corporation cause recognition of gain? Explain.6. LO.1 What is the control requirement of ? 351? Describe the effect of the following in satisfying this requirement:a. A shareholder renders only services to the corporation for stock.b. A shareholder renders services and transfers property to the corporation for stock.c. A shareholder has only momentary control after the transfer.d. A long period of time elapses between the transfers of property by different shareholders.7. LO.1 Nancy and her daughter, Kathleen, have been working together in a cattery called ?The Perfect Cat.? Nancy formed the business in 1998 as a sole proprietorship, and it has been very successful. Assets have a fair market value of $450,000 and a basis of $180,000. On the advice of their tax accountant, Nancy decides to incorporate ?The PerfectCat.? Because of Kathleen?s participation, Nancy would like her to receive shares in the corporation. What are the relevant tax issues?8. LO.1, 2, 7 Four friends plan to form a corporation for purposes of constructing a shopping center. Charlie will be contributing the land for the project and wants more security than shareholder status provides. He is contemplating two possibilities: receive corporate bonds for his land or take out a mortgage on the land before transferring it to the corporation. Comment on the choices Charlie is considering. What alternatives can you suggest?9. LO.1 Kirk and Annie transfer property to Falcon Corporation in exchange for twothirds of its stock, while Matt receives the other one-third for services rendered. Will the exchanges be taxable? Explain.10. LO.1 Should a transferor who receives stock for both property and services be included in the control group in determining whether an exchange meets the requirement of ? 351? Explain.11. LO.1 At a point when Robin Corporation has been in existence for six years, shareholderTed transfers real estate (adjusted basis of $20,000 and fair market value of $100,000) to the corporation for additional stock. At the same time, Peggy, the other shareholder, acquires one share of stock for cash. After the two transfers, the percentages of stock ownership are as follows: 79% by Ted and 21% by Peggy.a. What were the parties trying to accomplish?b. Will it work? Explain.12. LO.2 How does the transfer of mortgaged property to a controlled corporation affect the transferor-shareholder?s basis in stock received? Assume that no gain is recognized on the transfer.13. LO.2 Before incorporating her apartment rental business, Libbie takes out second mortgages on several of the units. She uses the mortgage proceeds to make capital improvements to the units. Along with all of the rental units, Libbie transfers the mortgages to the newly formed corporation in return for all of its stock. Discuss the tax consequences of these procedures.14. LO.2 Why does ? 357(c) require the recognition of gain when liabilities assumed by a corporation exceed the adjusted basis of the assets transferred?15. LO.3 Discuss how each of the following affects the calculation of the basis of stock received by a shareholder in a ? 351 transfer:a. The transfer of a liability to the corporation along with property.b. Property that has been transferred has built-in losses.c. The basis in the property transferred to the corporation.d. The receipt of ?other property? (i.e., boot) in addition to stock.16. LO.3 Identify a situation when a corporation can deduct the value of the stock it issues for the rendition of services. Identify a situation when a deduction is not available.17. LO.4 A corporation acquires property as a contribution to capital from a shareholder and from a nonshareholder. Are the rules pertaining to the property?s basis the same?Explain.18. LO.5 In structuring the capitalization of a corporation, what are the advantages and disadvantages of utilizing debt rather than equity?19. LO.5 In determining a corporation?s debt-equity ratio, should the book value or the fair market value of the assets be used? Explain. 20. LO.6 Under what circumstances, if any, may a shareholder deduct a business bad debt on a loan made to the corporation?21. LO.6 Four years ago Nelson purchased stock in Black Corporation for $37,000. The stock has a current value of $5,000. Nelson needs to decide which of the following alternatives to pursue. Determine the tax effect of each.a. Without selling the stock, Nelson deducts $32,000 for the partial worthlessness of theBlack Corporation investment.b. Nelson sells the stock to his aunt for $5,000 and deducts a $32,000 long-term capital loss.c. Nelson sells the stock to a third party and deducts an ordinary loss.d. Nelson sells the stock to his mother for $5,000 and deducts a $32,000 long-term capital loss.e. Nelson sells the stock to a third party and deducts a $32,000 long-term capital loss.22. LO.1, 7 Keith?s sole proprietorship holds assets that, if sold, would yield a gain of $100,000. It also owns assets that would yield a loss of $30,000. Keith incorporates his business using only the gain assets. Two days later Keith sells the loss assets to the newly formed corporation. What is Keith trying to accomplish? Will he be successful?Explain.23. LO.7 Sarah incorporates her small business but does not transfer the machinery and equipment the business uses to the corporation. Subsequently, the machinery and equipment are leased to the corporation for an annual rent. What tax reasons mightSarah have for not transferring the machinery and equipment to the corporation when the business was incorporated?


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