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Prentice Hall's Federal Taxation 2011: Corporations, 24e (Pope) Chapter 2 Corporate Formation and Capital Structure

1) A sole proprietor is required to use the same reporting period for both business and individual tax information. Answer: TRUE
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") % &orporations are flow#through entities' in whi&h % in&ome is allo&ated to shareholders. Answer: TRUE
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$) % &orporations must allo&ate in&ome to shareholders based on their proportionate sto&). Answer: TRUE
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*) The &he&)#the#box regulations permit an ++! to be taxed as a ! &orporation. Answer: TRUE


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-) There are no tax &onsequen&es of a partnership &onverting to a ! &orporation. Answer: .A+%E


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() %e& $-1 applies to an ex&hange if the &ontributing shareholders own more than -01 of a &orporation2s sto&) after the transfer. Answer: .A+%E
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3) The transferor2s basis for an4 non&ash boot propert4 re&eived in a %e&. $-1 transa&tion is the boot2s .56 redu&ed b4 an4 unre&ogni7ed gain. Answer: .A+%E
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,) A &orporation must re&ogni7e a loss when transferring non&ash boot propert4 that has de&lined in value and its sto&) to a transferor as part of a %e&. $-1 ex&hange. Answer: .A+%E
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/) 8f a &orporation2s total ad9usted bases for all properties transferred ex&eed the total .56 of the properties' the &orporation2s bases in the propert4 is limited to .56 if no ele&tion is made. Answer: TRUE
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10) The assignment of in&ome do&trine does not appl4 if the transferor in a %e&. $-1 ex&hange in whi&h no gain is otherwise re&ogni7ed transfers substantiall4 all the assets and liabilities of the transferor2s trade or business to the &ontrolled &orporation. Answer: TRUE
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11) An4 losses on the sale of %e&tion 1"** sto&) are ordinar4. Answer: .A+%E
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1") Upon formation of a &orporation' its assets have the same basis for boo) and tax purposes. Answer: .A+%E 1 Copyright 2011 Pearson Education, Inc.

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1$) :usiness assets of a sole proprietorship are owned b4 A) a member. :) an individual. !) a partner. ;) a sto&)holder. Answer: :
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1*) 8dentif4 whi&h of the following statements is false. A) A solel4#owned &orporation is a sole proprietorship. :) A sole proprietorship is a separate taxable entit4. !) A sole proprietor is &onsidered to be an emplo4ee of the business. ;) All are false. Answer: ;
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1-) <hi&h of the following is an advantage of a sole proprietorship over other business forms= A) tax#exempt treatment of fringe benefits :) the dedu&tion for &ompensation paid to the owner !) low tax rates on dividends ;) ease of formation Answer: ;
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1() <hi&h of the following statements about a partnership is true= A) A partnership is a taxpa4ing entit4. :) artners are taxed on distributions from a partnership. !) artners are taxed on their allo&able share of in&ome whether it is distributed or not. ;) artners are &onsidered emplo4ees of the partnership. Answer: !
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13) ;emar&us is a -01 partner in the ;> partner. ;> has taxable in&ome for the 4ear of ?"00'000. ;emar&us re&eived a ?3-'000 distribution from the partnership. <hat amount of in&ome related to ;> must ;emar&us re&ogni7e= A) ?"00'000 :) ?3-'000 !) ?100'000 ;) ?$3'-00 Answer: !
age Ref.: !:"#*@ Example !:"#$

1,) <hi&h of the following statements is in&orre&t= A) +imited partners2 liabilit4 for partnership debt is limited to their amount of investment. :) 8n a general partnership' all partners have unlimited liabilit4 for partnership debts. !) 8n a limited partnership' all partners parti&ipate in managerial de&ision#ma)ing. ;) All of the above are &orre&t. Answer: !
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1/) 8dentif4 whi&h of the following statements is true. A) ARegular &orporationA and A! &orporationA are s4non4mous terms. :) ARegular &orporationA and A% &orporationA are s4non4mous terms. !) A partner is generall4 &onsidered to be an emplo4ee of the partnership. 2 Copyright 2011 Pearson Education, Inc.

;) All are false. Answer: A


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"0) <hi&h of the following statements is &orre&t= A) An owner of a ! &orporation is taxed on his or her proportionate share of earnings. :) % shareholders are onl4 taxed on distributions. !) % shareholders are taxed on their proportionate share of earnings that are distributed. ;) % shareholders are taxed on their proportionate share of earnings whether or not distributed. Answer: ;
age Ref.: !:"#-' Example !:"#(

"1) 8dentif4 whi&h of the following statements is true. A) ! &orporation operating losses are dedu&tible b4 the individual shareholders. :) 8f a ! &orporation does not distribute its in&ome to its shareholders annuall4' double taxation &annot o&&ur. !) !apital losses in&urred b4 a ! &orporation &an be used to offset the &orporation2s ordinar4 in&ome. ;) All are false. Answer: ;
age Ref.: !:"#-' Example !:"#(

"") :read !orporation is a ! &orporation with earnings of ?100'000. 8t paid ?"0'000 in dividends to its sole shareholder' Berald. Berald also owns 1001 of :utter' an % &orporation. :utter had net taxable in&ome of ?,0'000 and made a ?1-'000 distribution to Berald. <hat in&ome will Berald report from :read and :utter2s a&tivities= A) ?$-'000 :) ?/-'000 !) ?100'000 ;) ?1,0'000 Answer: ! Explanation: !) C?,0'000 % &orporation in&ome D ?"0'000 dividends)
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"$) <hi&h of the following statements is in&orre&t= A) % &orporations must allo&ate in&ome and expenses to their shareholders based on their proportionate ownership interest. :) The number of % &orporation shareholders is unlimited. !) % &orporation in&ome is taxed to shareholders when earned. ;) % &orporation losses &an offset shareholder in&ome from other sour&es. Answer: :
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"*) <hi&h of the following statements is true= A) %hareholders in a ! &orporation &an use ! &orporation losses to offset shareholder in&ome from other sour&es. :) ! &orporation losses remain in the ! &orporation and &an offset in&ome from other 4ears. !) ! &orporation shareholders are taxed based on their proportionate share of in&ome. ;) ;istributions of ! &orporation in&ome are not taxable. Answer: :
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"-) 8dentif4 whi&h of the following statements is false. A) The &he&)#the#box regulations permit an ++! to be taxed as a ! &orporation. :) Under the &he&)#the#box regulations' an ++! that has onl4 two members Cowners) must be taxed as a partnership. !) A business need not be in&orporated under state or federal law to be taxed as a &orporation. ;) En&e an ele&tion is made to &hange its &lassifi&ation' an entit4 &annot &hange again for (0 months. Answer: :
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"() 8dentif4 whi&h of the following statements is true. A) Under the &he&)#the#box regulations' an ++! that has one member Cowner) ma4 be disregarded as an entit4 separate from its owner. :) An unin&orporated business ma4 not be taxed as a &orporation. !) A new ++! that is owned b4 four members ele&ts to be taxed under its default &lassifi&ation Cas a partnership) in its first 4ear of operations. The entit4 is prohibited from &hanging its tax &lassifi&ation at an4 time in the future. ;) All are false. Answer: A
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"3) Three members form an ++! in the &urrent 4ear. <hi&h of the following statements is in&orre&t= A) The ++!2s default &lassifi&ation under the &he&)#the#box rules is as a partnership. :) The ++! &an ele&t to have its default &lassifi&ation ignored. !) The ++! &an ele&t to be taxed as a ! &orporation with no spe&ial tax &onsequen&es. ;) 8f the ++! ele&ts to use its default &lassifi&ation' it &an ele&t to &hange its status to being taxed as a ! &orporation beginning with the third tax 4ear after the initial &lassifi&ation. Answer: ;
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",) 8dentif4 whi&h of the following statements is true. A) The ex&hange of sto&) for servi&es rendered is not a taxable transa&tion.. :) The repeal of %e&. $-1 would result in more existing businesses being in&orporated. !) %e&tion $-1 was ena&ted to allow taxpa4ers to in&orporate without in&urring adverse tax &onsequen&es. ;) All are false. Answer: !
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"/) 8dentif4 whi&h of the following statements is true. A) %e&tion $-1 applies ex&lusivel4 to the formation of a new &orporation. :) %e&tion $-1 applies to propert4 transfers in ex&hange for sto&). !) %e&tion $-1 onl4 applies to individuals transferors. ;) All are false. Answer: :
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$0) .or %e&. $-1 purposes the term Apropert4A does not in&lude A) &ash. :) a&&ounts re&eivable. !) inventor4. ;) servi&es rendered. Answer: ;
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$1) Rose and <a4ne form a new &orporation. Rose &ontributes &ash for ,-1 of the sto&) and <a4ne &ontributes servi&es for 1-1 of the sto&). The tax effe&t is A) Rose and <a4ne must re&ogni7e their reali7ed gains' if an4. :) <a4ne must report the .56 of the sto&) re&eived as &apital gain. !) Rose and <a4ne are not required to re&ogni7e their reali7ed gains. ;) <a4ne must report the .56 of the sto&) re&eived as ordinar4 in&ome. Answer: ;
age Ref.: !:"#1$@ Example !:"#1"

$") 8dentif4 whi&h of the following statements is true. A) A transferor2s gain or loss that goes unre&ogni7ed when %e&. $-1 applies is permanentl4 exempt from taxation. :) 8f a taxpa4er transfers propert4 and servi&es as part of a transa&tion meeting the %e&. $-1 requirements' all of the sto&) re&eived is &ounted in determining whether the propert4 transferors have a&quired &ontrol. !) 8f a taxpa4er transfers propert4 and servi&es as part of a transa&tion meeting the %e&. $-1 requirements' the nonre&ognition of gain or loss will appl4 to the servi&es. ;) All are false. Answer: :
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$$) >ermaine owns all "00 shares of ea&h !orporation sto&) valued at ?-0'000. Fen4a' a new shareholder' re&eives "00 newl4#issued shares from ea&h !orporation in ex&hange for inventor4 with an ad9usted basis of ?*0'000 and a .56 of ?-0'000. <hi&h of the following statements is &orre&t= A) Go gain will be re&ogni7ed b4 Fen4a. :) The transa&tion results in ?10'000 of ordinar4 in&ome for Fen4a. !) The transa&tion results in ?10'000 of &apital gain for Fen4a. ;) Fen4a ma4 defer the re&ognition of an4 tax until the sto&) is sold. Answer: :
age Ref.: !:"#1-@ Example !:"#1/

$*) 8dentif4 whi&h of the following statements is true. A) To qualif4 for %e&. $-1 treatment' &ontrol is defined as more than -01 ownership of the voting sto&)' and more than -01 of all other &lasses of sto&). :) 8f a shareholder re&eives sto&) with a .56 greater than the .56 of the propert4 ex&hanged in a %e&. $-1 transa&tion' the ex&ess .56 ma4 be &onsidered a gift from one shareholder to another shareholder. !) Enl4 transfers to newl4 &reated &orporations qualif4 for %e&. $-1 treatment. ;) All are false. Answer: :
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$-) :arr4' ;an' and Edith together form a new &orporation@ :arr4 and ;an ea&h &ontribute propert4 in ex&hange for sto&). <ithin two wee)s after the formation' the &orporation issues additional sto&) to Edith in ex&hange for propert4. :arr4 and ;an ea&h hold 10'000 shares and Edith will re&eive /'000 shares. <hi&h transa&tions will qualif4 for nonre&ognition= A) Enl4 the first transa&tion will qualif4 for nonre&ognition. :) Enl4 the se&ond transa&tion will qualif4 for nonre&ognition. !) :e&ause of the step transa&tion do&trine neither transa&tion will qualif4. ;) :oth transa&tions will qualif4 under %e&. $-1 if the4 are part of the same plan of in&orporation. Answer: ;
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$() 8n a&&ordan&e with the rules whi&h appl4 to &orporate formation' whi&h one of the following features does not ma)e an issue of preferred sto&) Anonqualified=A A) The shareholder &an require the &orporation to redeem the sto&). :) The dividend rate on the sto&) ma4 not var4 with interest rates' &ommodit4 pri&es' or other similar indi&es. !) The &orporation is either required to redeem the sto&) or is li)el4 to exer&ise a right to redeem the sto&). ;) The sto&) is limited and preferred as to dividends. Answer: :
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$3) Under %e&. $-1 &orporate sto&) ma4 in&lude all of the following ex&ept A) voting sto&). :) nonvoting sto&). !) sto&) warrants. ;) qualified preferred sto&). Answer: !
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$,) 5att and %heila form Frupp !orporation. 5att &ontributes propert4 with a .56 of ?--'000 and a basis of ?$-'000. %heila &ontributes propert4 with a .56 of ?3-'000 and a basis of ?*0'000. 5att sells his sto&) to aul shortl4 after the ex&hange. The transa&tion will A) not qualif4 under %e&. $-1. 6 Copyright 2011 Pearson Education, Inc.

:) qualif4 under %e&. $-1 if 5att &an show the sale to aul was not part of a prearranged plan. !) qualif4 with respe&t to %heila under %e&. $-1 whether 5att qualifies or not. ;) qualif4 under %e&. $-1 onl4 if an advan&e ruling has been obtained. Answer: :
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$/) :rad forms 6ott !orporation b4 &ontributing equipment whi&h has a basis of ?-0'000 and a .56 of ?*0'000 in ex&hange for 6ott sto&). :rad also &ontributes ?-'000 in &ash. 8f the transa&tion meets the %e&. $-1 &ontrol and ownership tests' what are the tax &onsequen&es to :rad= A) He re&ogni7es a ?-'000 loss. :) He re&ogni7es a ?-'000 gain and a ?10'000 loss. !) He re&ogni7es neither gain nor loss. ;) He re&ogni7es a ?10'000 loss. Answer: ! Explanation: !) +osses are not re&ogni7ed in a %e&. $-1 transa&tion
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*0) 8f an individual transfers an ongoing business to a &orporation in a %e&. $-1 ex&hange' the individual must re&ogni7e an4 reali7ed gain A) onl4 if the ad9usted basis of the propert4 transferred is less than the .56 of the sto&) re&eived. :) if the transferor re&eives propert4 other than sto&). !) if the .56 of the propert4 ex&hanged ex&eeds the .56 of the sto&) re&eived. ;) both A and : above Answer: :
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*1) !armen and 5ar& form Apple !orporation. !armen transfers land that is %e&. 1"$1 propert4' with an ad9usted basis of ?1,'000 and a .56 of ?"0'000 in ex&hange for one#half of the Apple !orporation sto&). 5ar& transfers equipment that originall4 &ost ?",'000 on whi&h he has ta)en ?-'000 in depre&iation dedu&tions. The equipment has a .56 of ?"-'000 and he re&eives one#half the sto&) and a ?-'000 short#term note. The transa&tion meets the requirements of %e&. $-1. <hi&h statement below is &orre&t= A) There is no re&ogni7ed gain or loss. :) !armen re&ogni7es ?"'000 %e&. 1"$1 gain and 5ar& re&ogni7es ?-'000 ordinar4 in&ome. !) !armen re&ogni7es ?"'000 %e&. 1"$1 gain and 5ar& re&ogni7es ?-'000 %e&. 1"$1 gain. ;) !armen re&ogni7es no gain and 5ar& re&ogni7es ?"'000 ordinar4 in&ome. Answer: ; Explanation: ;) 5ar& has a ?"'000 IC?"0'000 .56 sto&) D ?-'000 .56 note) # C?",'000 &ost #?-'000 depre&iation)J reali7ed gain' all of whi&h is re&ogni7ed be&ause he re&eived ?-'000 of boot in the form of a short#term note. The gain is ordinar4 in&ome under %e&. 1"*age Ref.: !:"#13

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*") 8dentif4 whi&h of the following statements is true. A) The definition of sto&) under %e&. $-1 in&ludes sto&) rights and warrants. :) The re&eipt of propert4 other than sto&) b4 the transferor will trigger the re&ognition of gain or loss under %e&. $-1. !) The &hara&ter of the gain re&ogni7ed b4 the transferor when boot is re&eived in a %e&. $-1 transa&tion depends upon the t4pe of boot re&eived. ;) All are false. Answer: ;
age Ref.: !:"#1(' !:"#13

*$) 8dentif4 whi&h of the following statements is true. A) To determine a shareholder2s basis in a single &lass of sto&) re&eived in a %e&. $-1 ex&hange' the .56 of the sto&) re&eived must be )nown. :) 8f more than one asset is transferred b4 the transferor in a %e&. $-1 nonre&ognition transa&tion' the transferor is assumed to have re&eived a proportionate share of the sto&)' &ash' and other boot propert4 for ea&h propert4 transferred based upon the assets2 relative .56s. !) The transferor2s basis for an4 non&ash boot propert4 re&eived in a %e&. $-1 transa&tion is the boot2s .56 redu&ed b4 an4 unre&ogni7ed gain. ;) All are false. Answer: :
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**) 8dentif4 whi&h of the following statements is true. A) 8f sto&) and boot propert4 are both re&eived in a %e&. $-1 ex&hange' the transferor must allo&ate the total basis in the &ontributed propert4 between the sto&) and boot propert4 based on the relative .56s of the sto&) and the boot propert4. :) The ad9usted basis of sto&) re&eived in a %e&. $-1 transa&tion is &omputed b4 dedu&ting the deferred loss from the .56 of the sto&) re&eived. !) The holding period for sto&) re&eived in a %e&. $-1 transa&tion in ex&hange for a &apital asset begins on the da4 after the date of the ex&hange. ;) All are false. Answer: ;
age Ref.: !:"#1,' !:"#1/

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*-) >err4 transfers two assets to a &orporation as part of a %e&. $-1 ex&hange. The first asset has an ad9usted basis of ?30'000 and a .56 of ?-0'000. The se&ond asset has an ad9usted basis of ?30'000 and a .56 of ?1-0'000. The .56 of the sto&) re&eived is ?1,0'000 and he also re&eives ?"0'000 &ash. The reali7ed and re&ogni7ed gain on the se&ond asset is A) ?,0'000 reali7ed@ ?"0'000 re&ogni7ed. :) ?,0'000 reali7ed@ ?1-'000 re&ogni7ed. !) ?"0'000 reali7ed@ ?10'000 re&ogni7ed. ;) ?10'000 reali7ed@ ?10'000 re&ogni7ed. Answer: : 2nd Explanation: :) 1st Asset Asset Total ?-0'000 ?1-0'000 .56 K ?"00'000 C30'000) C30'000) K C1*0'000) 5inus: Ad9usted basis ?"0'000) ? ,0'000 K ? (0'000 Reali7ed gain Closs) ? -'000a ? 1-'000b K ? "0'000 Allo&ation of boot ? #0# ? 1-'000 K ? 1-'000 Re&ogni7ed gain a -0L"00 M ?"0'000 b 1-0L"00 M ?"0'000
age Ref.: !:"#13' !:"#1,

*() 5ax transfers the following properties to a newl4#&reated &orporation for ?/0'000 of sto&) and ?10'000 &ash in a transa&tion that qualifies under %e&. $-1. Asset One .56 :asis ?$0'000 $-'000 Asset Two ?*-'000 *0'000 Asset Three ?"-'000 "0'000

5ax2s re&ogni7ed gain is A) ?$'000. :) ?-'000. !) ?3'000. ;) ?10'000. Answer: ! Asset Explanation: !) One .56 5inus: Ad9usted ?$0'000 basis Reali7ed gain Closs) C$-'000) C?-'000)

Asset Two

Asset Three

Total K ?100'000 K C/-'000) K ? -'000 K ? 10'000 K ? 3'000 gain

?*-'000 ?"-'000 C*0'000) C"0'000) ? -'000 ? -'000

:oot ? $'000a ? *'$00b ? "'-00& Re&ogni7ed gain ? #0# ? *'-00 ? "'-00 Closs) a C$0L100 M ?10'000) b C*-L100 M ?10'000) & C"-L100 M ?10'000)
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*3) !herie transfers two assets to a newl4#&reated &orporation. The first asset has an ad9usted basis of ?*0'000 and a .56 of ?-0'000. The se&ond asset has an ad9usted basis of ! Copyright 2011 Pearson Education, Inc.

?$-'000 and a .56 of ?"-'000. !herie re&eives !herie must re&ogni7e a gain of A) ?10'000. :) ?('000. !) ?-'000. ;) ?*'000. Answer: : 2nd Explanation: :) 1st Asset Asset ?-0'000 ?"-'000 .56 C*0'000) C$-'000) 5inus: Ad9usted basis ?10'000) ? 10'000 Reali7ed gain Closs) Allo&ation of boot Re&ogni7ed gain a C"L$ M ?/'000) b C1L$ M ?/'000)
age Ref.: !:"#13' !:"#1,

sto&) with .56 of ?(('000 and ?/'000 &ash.

Total K ?3-'000 K C3-'000) K? 0# K ? /'000 K ? ('000

? ('000a ? $'000b ? ('000 ? #0#

*,) Henr4 transfers propert4 with an ad9usted basis of ?/0'000 and a .56 of ?100'000 to a newl4#formed &orporation in a %e&. $-1 ex&hange. Henr4 re&eives sto&) with a .56 of ?,0'000 and a short#term note with a ?"0'000 .56. Henr42s re&ogni7ed gain is A) ?0. :) ?-'000. !) ?10'000. ;) ?"0'000. Answer: ! Explanation: !) Reali7ed gain is re&ogni7ed to the extent of boot re&eived. The short#term note is boot' but onl4 ?10'000 Cthe reali7ed gain) is re&ogni7ed. .56 ?100'000 5inus: Ad9usted basis C /0'000) Bain reali7ed ? 10'000 :oot ? "0'000 Bain re&ogni7ed ? 10'000
age Ref.: !:"#1(' !:"#13

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*/) Henr4 transfers propert4 with an ad9usted basis of ?/-'000 and a .56 of ?100'000 to a newl4 formed &orporation in a %e&. $-1 ex&hange. Henr4 re&eives sto&) with a .56 of ?,-'000 and a short#term note with a ?1-'000 .56. Henr42s basis in the sto&) is A) ?100'000. :) ?/-'000. !) ?/0'000. ;) ?,-'000. Answer: ; Explanation: ;) Transferor2s basis ?/-'000 5inus: :oot re&eived C1-'000) lus: Bain re&ogni7ed -'000 %to&) basis ?,-'000
age Ref.: !:"#1,

-0) A shareholder2s basis in sto&) re&eived in a %e&. $-1 transa&tion is A) in&reased b4 gain re&ogni7ed b4 the &orporation. :) de&reased b4 gain re&ogni7ed b4 the transferor. !) de&reased b4 liabilities assumed b4 the &orporation. ;) in&reased b4 the .56 of boot re&eived from the &orporation. Answer: !
age Ref.: !:"#1,

-1) >erem4 transfers %e&. $-1 propert4 a&quired three 4ears earlier having a ?100'000 basis and a ?1(0'000 .56 to >eneva !orporation. >erem4 re&eives all "00 shares of >eneva sto&)' having a ?1*0'000 .56' and a ?"0'000 /0#da4 >eneva note. <hat is >erem42s re&ogni7ed gain= A) ?0 :) ?(0'000 !) ?"0'000 ;) ?1(0'000 Answer: ! Explanation: !) .56 of sto&) re&eived ? 1*0'000 lus: .56 of /0#da4 note "0'000 Amount reali7ed ?1(0'000 5inus: Ad9usted basis of propert4 transferred C100'000) Reali7ed gain ? (0'000 >erem42s re&ogni7ed gain is the lesser of the reali7ed gain or the .56 of the /0#da4 note Cboot propert4)
age Ref.: !:"#1,

-") !arol4n transfers propert4 with an ad9usted basis of ?-0'000 and a .56 of ?(0'000 in ex&hange for rime !orporation sto&) in a %e&. $-1 transa&tion. !arol4n2s basis in the sto&) is A) ?(0'000. :) ?-0'000. !) ?10'000. ;) ?0. Answer: : Explanation: :) Ad9usted basis of propert4 transferred C?-0'000) minus boot re&eived C0) plus gain re&ogni7ed C0) equals ?-0'000
age Ref.: !:"#1,' !:"#1/

-$) Ralph transfers propert4 with an ad9usted basis of ?(-'000 and a .56 of ?30'000 to +a)e !orporation in a %e&. $-1 transa&tion. Ralph re&eives sto&) worth ?(0'000 and a short# term note having a ?10'000 .56. Ralph2s basis in the sto&) is A) ?3-'000. 11 Copyright 2011 Pearson Education, Inc.

:) ?30'000. !) ?(-'000. ;) ?(0'000. Answer: ; Explanation: ;) %to&) and note 5inus: Ad9. :asis Reali7ed gain :oot Re&ogni7ed gain ?30'000 C(-'000) ? -'000 ?10'000 ? -'000 Transferor2s basis 5inus: .56 of boot re&eived lus: Bain re&ogni7ed Transferor2s sto&) basis ?(-'000 C10'000) -'000 ?(0'000

age Ref.: !:"#1,' !:"#1/

-*) %arah transfers propert4 with an ?,0'000 ad9usted basis and a ?100'000 .56 to %uper !orporation in a %e&. $-1 transa&tion. %arah re&eives sto&) with an ?,-'000 .56 and a short#term note with a ?1-'000 .56. %arah2s basis in the sto&) is A) ?100'000. :) ?/-'000. !) ?,-'000. ;) ?,0'000. Answer: ; Explanation: ;) Transferor2s basis 5inus: .5 of boot re&eived lus: Bain re&ogni7ed Transferor2s sto&) basis

.56 5inus: Ad9. :asis Reali7ed gain :oot Re&ogni7ed gain


age Ref.: !:"#1/

?100'000 C ,0'000) ? "0'000 ? 1-'000 ? 1-'000

?,0'000 C1-'000) 1-'000 ?,0'000

--) The transferor2s holding period for an4 sto&) re&eived in ex&hange for a &apital asset A) in&ludes the holding period for the propert4 transferred. :) begins on the da4 after the ex&hange. !) begins on the da4 of the ex&hange. ;) none of the above Answer: A
age Ref.: !:"#1/

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-() The transferor2s holding period for an4 boot propert4 re&eived in a %e&. $-1 sto&) ex&hange A) in&ludes the holding period for the boot transferred. :) begins on the da4 after the ex&hange. !) begins on the da4 of the ex&hange. ;) is the same as the holding period of the sto&) re&eived in the ex&hange. Answer: :
age Ref.: !:"#1/

-3) :eth transfers an asset having a .56 of ?"00'000 and an ad9usted basis of ?1-0'000 to A:! !orporation in a %e&. $-1 transa&tion. :eth re&eives in ex&hange A:! &ommon sto&) having a .56 of ?13-'000 and Neus !orporation &ommon sto&) Ca &apital asset) having a .56 of ?"-'000 and a basis of ?10'000 to A:! !orporation. A:! !orporation must re&ogni7e A) no gain. :) ?1-'000 &apital gain. !) ?"-'000 &apital gain. ;) ?-0'000 &apital gain. Answer: :
age Ref.: !:"#"0@ Example !:"#$0

-,) !hris transfers land with a basis of ?*0'000 to <ebb !orporation in ex&hange for 1001 of <ebb2s sto&). At the date of the transfer' the land had a ?$0'000 fair mar)et value. Absent an ele&tion b4 !hris' <ebb2s basis in the land is A) ?$0'000. :) ?$-'000. !) ?*0'000. ;) none of the above Answer: A
age Ref.: !:"#"1' !:"#""

-/) !hris transfers land with a basis of ?*0'000 to <ebb !orporation in ex&hange for 1001 of <ebb2s sto&). At the date of the transfer' the land had a ?$0'000 fair mar)et value. !hris ma)es an ele&tion to redu&e his basis in <ebb2s sto&) to ?$0'000' so <ebb2s basis in the land is A) ?$0'000. :) ?$-'000. !) ?*0'000. ;) none of the above Answer: !
age Ref.: !:"#"1' !:"#""

(0) The transferee &orporation2s basis in propert4 re&eived in a %e&. $-1 ex&hange is A) the .56 of the propert4 re&eived. :) the transferee &orporation2s basis in the sto&) ex&hanged. !) the transferor2s basis for the propert4 plus gain re&ogni7ed b4 the transferor. ;) the transferor2s basis for the propert4 plus gain re&ogni7ed b4 the transferee &orporation. Answer: A
age Ref.: !:"#"1

(1) 8dentif4 whi&h of the following statements is true. A) %e&tion $-1 provides for nonre&ognition of gain for the transferee &orporation when it distributes appre&iated land that is boot propert4 to a shareholder. :) A &orporation must re&ogni7e a loss when transferring non&ash boot propert4 that has de&lined in value and its sto&) to a transferor as part of a %e&. $-1 ex&hange. !) The transferee &orporation2s holding period for assets a&quired in an ex&hange meeting the %e&. $-1 requirements in&ludes the transferor2s holding period for the propert4. ;) All are false. 13 Copyright 2011 Pearson Education, Inc.

Answer: !

age Ref.: !:"#"1

(") 5ario and +upita form a &orporation in a transa&tion &oming under %e&. $-1. +upita transfers propert4 with an ad9usted basis of ?1-0'000 and a .56 of ?"00'000 in ex&hange for one#half of the sto&). The propert4 has an ?,0'000 mortgage' whi&h the &orporation assumes. +upita has a re&ogni7ed gain of A) ?0. :) ?-0'000. !) ?100'000. ;) ?,0'000. Answer: A Explanation: A) The mortgage is not in ex&ess of the propert42s ad9usted basis and not indi&ative of a tax avoidan&e motive' therefore no gain is re&ogni7ed
age Ref.: !:"#""' !:"#"$

($) 5ario and +upita form a &orporation in a transa&tion &oming under %e&. $-1. +upita transfers propert4 with an ad9usted basis of ?1-0'000 and a .56 of ?"00'000 in ex&hange for one#half of the sto&). The propert4 has an ?,0'000 mortgage' whi&h the &orporation assumes. The &orporation2s basis in the propert4 is A) ?"00'000. :) ?1-0'000. !) ?,0'000. ;) ?1$0'000. Answer: : Explanation: :) The transferor2s basis for the propert4 be&omes the &orporation2s basis
age Ref.: !:"#"$

(*) +4nn transfers land having a ?-0'000 ad9usted basis' an ?,0'000 .56 and ?10'000 &ash to Allied !orporation in ex&hange for 1001 of Allied2s sto&). The &orporation assumes the ?30'000 mortgage on the land. <hi&h of the following statements is &orre&t= A) +4nn re&ogni7es no gain and the sto&) basis is ?(0'000. :) +4nn re&ogni7es ?10'000 gain and the sto&) basis is ?(0'000. !) +4nn re&ogni7es no gain and the sto&) basis is ?-0'000. ;) +4nn re&ogni7es ?10'000 gain and the sto&) basis is 7ero. Answer: ; Explanation: ;) 5ortgage assumed C?30'000) ex&eeds total basis of propert4 transferred ?(0'000 C?-0'000 D ?10'000) b4 ?10'000. Re&ogni7ed gain K ?10'000. %to&) basis K ?-0'000 D ?10'000 D ?10'000 gain # ?30'000 liabilit4 K ?0
age Ref.: !:"#"*@ Example !:"#$3

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(-) 8dentif4 whi&h of the following statements is true. A) The transferee &orporation2s a&quisition or assumption of liabilities in ex&ess of the total ad9usted bases of the properties transferred b4 a transferor results in gain re&ognition b4 the transferor. :) <hen a transferor ex&hanges a mortgaged propert4 under %e&. $-1 and the amount of the mortgage is greater than the transferor2s basis in the propert4' the transferor2s basis in the sto&) re&eived will be equal to the basis the transferor had in the mortgaged propert4. !) <hen forming a &orporation' the a&&ounts pa4able of a transferor2s business are not liabilities for gain &omputation purposes if the transferor2s business uses the a&&rual method of a&&ounting. ;) All are false. Answer: A
age Ref.: !:"#"$' !:"#"*

(() 5artin operates a law pra&ti&e as a sole proprietorship' using the &ash method of a&&ounting. 5artin in&orporates the law pra&ti&e and transfers the following items to a new' solel4#owned &orporation.

Adjusted Basis !ash Equipment A&&ounts re&eivable A&&ounts pa4able Cdedu&tible expenses) Gote pa4able Con equipment) ?10'000 ,0'000 0 0 -0'000

FM ? 10'000 100'000 1"0'000 (0'000 -0'000

5artin must re&ogni7e a gain of and has a sto&) basis of. A) ?0@ ?$0'000 :) ?0@ ?*0'000 !) ?"0'000@ ?$0'000 ;) ?"0'000@ ?*0'000 Answer: : Explanation: :) The a&&ounts pa4able are not &onsidered liabilities under %e&. $-3C&) sin&e the pa4ment of the pa4ables gives rise to a dedu&tion. %to&) basis equals: &ash basis ?10'000 plus equipment basis ?,0'000' less liabilit4 transferred ?-0'000 K ?*0'000
age Ref.: !:"#"*' !:"#"-@ Example !:"#$,

(3) %ilvia transfers to +eaf !orporation a ma&hine she had pur&hased a 4ear ago for ?-0'000. The ma&hine has a ?*0'000 ad9usted basis and a ?--'000 .56 on the transfer date. ?10'000 in depre&iation was &laimed b4 %ilvia prior to the transfer. %ilvia re&eives all 1'000 shares of +eaf !orporation sto&) worth ?-0'000 and a two#4ear note with a ?-'000 .56. <hat is the amount and &hara&ter of the re&ogni7ed gain or loss= A) ?1-'000 ordinar4 in&ome :) ?1-'000 &apital gain !) ?-'000 ordinar4 in&ome ;) ?-'000 &apital gain Answer: !
age Ref.: !:"#"-

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(,) >erem4 operates a business as a sole proprietorship. The proprietorship uses the &ash method of a&&ounting. He de&ides to in&orporate and transfers the assets and liabilities of the sole proprietorship to the newl4 formed &orporation in ex&hange for its sto&). The assets' whi&h in&lude ?10'000 of a&&ounts re&eivable with a 7ero basis' have a basis of ?"0'000 and a .56 of ?*0'000. The liabilities in&lude a&&ounts pa4able of ?1"'000 whi&h will be dedu&tible when paid and a note pa4able on medi&al equipment of ?3'000. >erem42s basis for his sto&) is A) ?*0'000. :) ?"0'000. !) ?1$'000. ;) ?,'000. Answer: ! Explanation: !) Redu&e basis b4 amount of the note pa4able C?"0'000 # ?3'000). 8gnore a&&ounts pa4able sin&e the &orporation will pa4 and dedu&t them
age Ref.: !:"#"*' !:"#"-

(/) !olleen operates a business as a sole proprietorship. %he pur&hased a &omputer for ?10'000 last 4ear. The &omputer is -#4ear re&over4 propert4 for 5A!R% purposes and is depre&iated under the regular 5A!R% rules. This 4ear' !olleen in&orporates the business and transfers the &omputer to the new &orporation on >ul4 "0. The depre&iation on the &omputer for this 4ear allo&able to the sole proprietorship is A) ?1',(,. :) ?1'(00. !) ?1'$$$. ;) ?-00. Answer: : Explanation: :) 5A!R% K ;;: with half#4ear &onvention for first 4ear Oear 1 K ?10'000 M 0."0 K ?"'000 Oear " K ?10'000 M 0.$" M ( months K ?1'(00 All depre&iation for the month of >ul4 is allo&ated to the &orporation
age Ref.: !:"#"(@ Example !:"#*0

30) 8dentif4 whi&h of the following statements is true. A) The transferor must re&apture depre&iation when ex&hanging %e&. 1"*- propert4 in all transa&tions &oming under %e&. $-1. :) A &orporation re&eiving propert4 in a %e&. $-1 ex&hange &an sele&t an4 5A!R% depre&iation method for the asset. !) <hen depre&iable propert4 is transferred to a &orporation in a %e&. $-1 ex&hange in whi&h no gain is re&ogni7ed' the &orporation must &ontinue to use the transferor2s depre&iation method and re&over4 period for the propert4. ;) All are false. Answer: !
age Ref.: !:"#"(

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31) 8dentif4 whi&h of the following statements is true. A) The assignment of in&ome do&trine requires a &ash method of a&&ounting transferorLshareholder to re&ogni7e in&ome when a&&ounts re&eivable are transferred b4 the shareholder to the &orporation in a %e&. $-1 ex&hange in whi&h no gain is otherwise re&ogni7ed. :) The assignment of in&ome do&trine is a legislative requirement that in&ome be taxed to the person who earns it. !) The assignment of in&ome do&trine does not appl4 if the transferor in a %e&. $-1 ex&hange in whi&h no gain is otherwise re&ogni7ed transfers substantiall4 all the assets and liabilities of the transferor2s trade or business to a &ontrolled &orporation. ;) All are false. Answer: !
age Ref.: !:"#"3

3") A medi&al do&tor in&orporates her medi&al pra&ti&e whi&h is operated as a sole proprietorship. The proprietorship uses the &ash method of a&&ounting. Among the assets &ontributed to the new &orporation are unreali7ed re&eivables worth ?*0'000. The re&eivables are &olle&ted b4 the &orporation. <hi&h of the following statements is &orre&t= A) The ?*0'000 of re&eivables is in&luded as ordinar4 in&ome on the do&tor2s personal in&ome tax return when &olle&ted b4 the &orporation. :) The do&tor must in&lude the ?*0'000 as ordinar4 in&ome in her personal in&ome tax return at the time of in&orporation. !) The ?*0'000 of re&eivables is in&luded as ordinar4 in&ome in the &orporation2s in&ome tax return at the time of in&orporation. ;) The ?*0'000 of re&eivables is in&luded as ordinar4 in&ome in the &orporation2s in&ome tax return when &olle&ted. Answer: ;
age Ref.: !:"#"3@ Example !:"#*"

3$) The !it4 of %pringfield donates land worth ?"-0'000 to ;eu&e !orporation to indu&e it to lo&ate in %pringfield and provide 1'000 9obs for its &iti7ens. How mu&h gross in&ome must ;eu&e !orporation re&ogni7e be&ause of the land &ontribution' and what is the land2s basis to ;eu&e !orporation= A) ?"-0'000 in&ome@ ?"-0'000 basis :) ?"-0'000 in&ome@ ?0 basis !) ?0 in&ome@ ?"-0'000 basis ;) ?0 in&ome@ ?0 basis Answer: ;
age Ref.: !:"#$1@ Example !:"#*-

3*) The !it4 of ortland gives ;ata !orporation ?(0'000 &ash and land worth ?100'000 to indu&e it to move. The &ash was not spent during the 1" months following &ontribution. The &ontribution results in A) in&ome re&ognition in the amount of ?1(0'000 to the &orporation at the time of &ontribution. :) in&ome re&ognition in the amount of ?(0'000 to the &orporation 1" months after the time of &ontribution. !) 7ero basis in the land and ?(0'000 ordinar4 in&ome to the &orporation "* months after the time of &ontribution if the &ash is not used to pur&hase an asset. ;) 7ero basis in the land and a ?(0'000 basis redu&tion in other assets. Answer: ;
age Ref.: !:"#$1@ Example !:"#*-

3-) 8dentif4 whi&h of the following statements is true. A) ropert4 &ontributions to a &orporation b4 nonshareholders will result in in&ome re&ognition b4 the &orporation if the &ontributed propert4 is subsequentl4 sold. :) %e&tion 1"** ordinar4 loss treatment is available to an4 shareholder. 17 Copyright 2011 Pearson Education, Inc.

!) A taxpa4er must ma)e a spe&ial ele&tion to ta)e advantage of %e&. 1"**. ;) All are false. Answer: A
age Ref.: !:"#$1' !:"#$"

3() Ralph and Oolanda pur&hased "01 of the initial offering of 5a9or !orporation &ommon sto&) for ?1-0'000. 5a9or !orporation is a qualif4ing small business &orporation and the sto&) qualifies as %e&. 1"** sto&). Ten months later 5a9or !orporation files for ban)rupt&4 and the shareholders are notified that the sto&) is worthless. Ralph and Oolanda' who are married and file a 9oint return' have a A) ?1-0'000 ordinar4 loss. :) ?1-0'000 &apital loss. !) ?100'000 ordinar4 loss@ ?-0'000 &apital loss. ;) ?100'000 ordinar4 loss@ ?-0'000 ordinar4 loss &arr4forward. Answer: !
age Ref.: !:"#$"@ Example !:"#*(

33) Oenhung' who is single' forms a &orporation using a tax#free asset transfer' whi&h qualifies under %e&. $-1. %he &ontributes propert4 having an ad9usted basis of ?-0'000 and a .56 of ?*0'000. The sto&) re&eived from the &orporation is %e&. 1"** sto&). <hen Oenhung sells the sto&) for ?$0'000' her loss is A) Ordinar! loss Capital loss ? #0# ?"0'000 :) Ordinar! loss Capital loss ?10'000 ?10'000 !) Ordinar! loss Capital loss ?"0'000 ? #0# ;) Ordinar! loss Capital loss ?10'000 ? #0# Answer: : Explanation: :) The loss on formation of the &orporation C?10'000) is postponed until the sto&) is sold and retains its &hara&ter as &apital. ?10'000 of the loss C?$0'000 sales pro&eeds # ?*0'000 %e&. 1"** basis) qualifies as an ordinar4 loss on the sale of %e&. 1"** sto&)
age Ref.: !:"#$$@ Example !:"#*3

3,) Gathan is single and owns a -*1 interest in the new GT artnership' a &alendar 4ear entit4. The GT artnership reports ?100'000 of profits for its first 4ear. Assuming Gathan is taxed at a $-1 marginal tax rate on the additional in&ome' how mu&h tax does Gathan owe if the GT artnership does not distribute an4 of its profits to him= Answer: Gathan owes on -*1 of GT artnership2s profits whether the4 are distributed or not to him. Thus' he owes $-1 of ?-*'000' or ?1,'/00.
age Ref.: !:"#*@ Example !:"#$

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3/) En >anuar4 1 of the &urrent 4ear Rae pur&hases 1001 of %un !orporation sto&) for ?$0'000. %un !orporation reports taxable in&ome of ?"-'000 in the &urrent 4ear' on whi&h it pa4s tax of ?$'3-0. Gone of the remaining ?"1'"-0 is distributed to Rae. However' on >anuar4 1 of the next 4ear Rae sells her sto&) to +ee for ?-1'"-0. <hat are the tax &onsequen&es to Rae of the sale= Answer: Rae must report a &apital gain of ?"1'"-0 C?-1'"-0 # ?$0'000). Thus' %un !orporation2s profit is taxed twi&e # on&e at the &orporate level and again at the shareholder level when the sto&) is sold.
age Ref.: !:"#-' Example !:"#(

,0) <hat are the tax &onsequen&es to <hitne4 who owns -01 of 5useum !orporation' a qualif4ing % !orporation that is a &alendar 4ear entit4' if 5useum !orporation reports ?(0'000 of taxable in&ome= How would 4our answer &hange if 5useum !orporation reported a ?*0'000 loss= Answer: <hitne4 must pa4 taxes on ?$0'000' his -01 share of 5useum !orporation2s in&ome whether it is distributed to him or not. 5useum !orporation pa4s no &orporate in&ome taxes. 8f 5useum !orporation reports a ?*0'000 loss' <hitne42s ?"0'000 share of the loss redu&es his taxable in&ome.
age Ref.: !:"#3' Example !:"#3

,1) En >anuar4 "0 of the &urrent 4ear' a group of ten individuals organi7e an ++! to &ondu&t an in) ma)ing business in .lorida. This 4ear the ++! is an eligible entit4 under the &he&)#the# box regulations. How will the ++! be taxed= Answer: The owners ma4 ele&t to have the ++! taxed as a &orporation. However' if the4 do not ma)e the ele&tion' the ++! will be taxed as a partnership.
age Ref.: !:"#,' Example !:"#,

,") 5aria has been operating a business as a sole proprietorship for several 4ears. %he needs additional &apital and wants in in&orporate her business. The assets of her business Cbuilding' land' inventor4' and so on) have a ?*00'000 ad9usted basis and a ?1.- million .56. 5aria is willing to ex&hange the assets for 1'-00 shares of 5etro !orporation sto&) ea&h having a ?1'000 .56. :ill and >ohn are ea&h willing to invest ?-00'000 in 5aria2s business and will ea&h re&eive -00 shares of sto&). <h4 is %e&. $-1 important to 5aria= ;oes it matter to :ill and >ohn= Answer: 8f not for %e&. $-1' 5aria would re&ogni7e gain on the in&orporation of her business. %he has a ?1.1 million C?1.- million # ?*00'000) reali7ed gain on her &ontribution of the proprietorship2s assets to a new &orporation in ex&hange for (01 of its outstanding shares. However' under %e&. $-1' she re&ogni7ed none of the gain. %e&tion $-1 does not affe&t :ill and >ohn as the4 are ea&h simpl4 pur&hasing "01 of the new &orporations sto&) for ?-00'000 &ash. The4 do not reali7e or re&ogni7ed an4 gain whether %e&. $-1 applies or not.
age Ref.: !:"#11

,$) hil and Gi&) form hilni&) !orporation. hil ex&hanges &ash and other propert4 for /00 shares C/01 of the outstanding shares) of hilni&) sto&). Gi&) performs a&&ounting servi&es in ex&hange for 100 shares of hilni&) sto&) worth ?10'000. <hat are the tax &onsequen&es from forming the hilni&) !orporation to hil and Gi&)= Answer: hil2s ex&hange of assets for sto&) qualifies for %e&. $-1Ca) treatment' thus is tax# free. Gi&)2s ex&hange of servi&es for sto&) is not tax#free under %e&. $-1. Thus' Gi&) must re&ogni7e ?10'000 of ordinar4 in&ome' the .56 of the hilni&) sto&) re&eived. Gi&)2s basis in the hilni&) sto&) re&eived is ?10'000' its .56.
age Ref.: !:"#1$@ Example !:"#1"

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,*) 8n whi&h of the following independent situations is the %e&. $-1 &ontrol requirement met= a. >ane transfers propert4 to >et !orporation for 3-1 of >et !orporation2s sto&)' and %usan providesservi&es to >et !orporation for the remaining "-1 of >et !orporation sto&). b. aul transfers propert4 to ride !orporation for (01 of ride2s sto&)' and :ob transfers propert4 worth ?1-'000 and performs servi&es worth ?"-'000 for the remaining *01 of ride2s sto&). &. Herb and his wife !arol4n ea&h have owned -01 of the 100 outstanding shares of <4)ert !orporation sto&) sin&e it was formed three 4ears ago. 8n the &urrent 4ear' their daughter' !ind4' transfers propert4 to <4)ert !orporation for -0 newl4 issued shares of <4)ert sto&). d. >ohn and am develop a plan to form > !orporation on 5a4 " of this 4ear. >ohn transfers propert4worth ?-0'000 for -0 shares of > !orporation sto&). As part of the single plan to in&orporate' am transfers ?-0'000 &ash for -0 shares of > !orporation sto&) on >ul4 1. e. Assume the same fa&ts as in art d.' ex&ept that >ohn has a prearranged plan to sell $0 of his shares to %teven on %eptember 1. Answer: a. Got met. Transferors of propert4 re&eive onl4 3-1 and the4 do not have ,01 &ontrol. b. 5et. :ob transferred more than a nominal amount of propert4. The ,01 &ontrol test is met sin&e all of :ob2s sto&) is &ounted for this purpose. &. Got met. !ind4 owns onl4 one#third of the sto&) immediatel4 after the ex&hange. Go attribution o&&urs from !ind42s parents to !ind4. d. 5et. >ohn and am own 1001 of > !orporation. The transfers do not have to be simultaneous. e. Got met. >ohn had a prearranged plan to sell a suffi&ient amount of shares to &ause the &ontrol requirement not to be met.
age Ref.: !:"#1*

,-) .rans and Arie own 3- shares and "- shares of 6ogel !orporation sto&)' respe&tivel4. There are no other owners. .rans transfers propert4 with a ?$0'000 ad9usted basis and a ?-0'000 .56 to 6ogel !orporation in ex&hange for an additional "- shares of 6ogel sto&). ;oes this propert4 for sto&) ex&hange qualif4 for %e&. $-1 treatment= Answer: Oes sin&e .rans owned ,01 C100L1"-) of the 6ogel sto&) and is in &ontrol of 6ogel !orporation' .rans does not re&ogni7e an4 gain on the ex&hange.
age Ref.: !:"#1*

,() .or the last four 4ears' :ob and Ellen have ea&h owned 100 of the "00 outstanding shares of Ra&er !orporation2s sto&). :ob transfers land having a ?10'000 basis and a ?$0'000 .56 to Ra&er for an additional $0 shares of sto&) and Ellen transfers ?"'000 for an additional two shares of sto&). <hat is the amount of gain or loss that :ob must re&ogni7e on the ex&hange= 8f the transa&tion does not &ompl4 with the %e&. $-1 requirements' how &an it be made to &ompl4= Answer: :ob must re&ogni7e ?"0'000 C?$0'000 # ?10'000) of gain on the ex&hange. %in&e Ellen onl4 &ontributed &ash' she does not re&ogni7e an4 gain or loss. 8f Ellen obtained additional sto&) worth at least 101 of the value of the sto&) she alread4 owns Ci.e.' at least 10 shares worth ?10'000)' her sto&) would be &ounted for &ontrol purposes and then %e&. $-1 would appl4. Alternativel4' if :ob a&quired suffi&ient sto&) to own ,01 of the outstanding sto&) after the ex&hange' %e&. $-1 would also appl4. 8f %e&. $-1 applies' :ob will re&ogni7e no gain on the ex&hange.
age Ref.: !:"#1*

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,3) ;an transfers propert4 with an ad9usted basis of ?-0'000 and a .56 of ?100'000 to a newl4#formed %un !orporation in ex&hange for -00 shares of %un sto&) whi&h is one#half of the outstanding %un sto&). His daughter' %4lvia' transfers propert4 with an ad9usted basis of ?"-'000 and a .56 of ?-0'000 for the other -00 shares at the same time.. <hat are the tax &onsequen&es of the two transfers assuming all the requirements of %e&. $-1 are met= Answer: Go gain or loss is re&ogni7ed b4 either ;an or %4lvia. However' sin&e the sto&) was not re&eived in proportion to the relative .56s of the properties &ontributed' the 8R% ma4 attempt to re&onstru&t the transa&tion in the form that ;an has re&eived ((3 shares of sto&) and made a gift of 1(3 shares to his daughter %4lvia. ;an2s basis in his -00 shares of sto&) is ?$3'-$, IC-00L((3)M?-0'000 basis in propert4 transferredJ. %4lvia2s basis in her -00 shares is ?$3'*(" I?"-'000 basis in propert4 transferred D C?-0'000 # ?$3'-$,) basis in the shares re&eived as a gift from ;anJ.
age Ref.: !:"#1-

,,) Tani&ia owns all 100 shares of 5idwest !orporation2s sto&)' valued at ?100'000. Bwen owns propert4 that has a ?1-'000 ad9usted basis and a ?100'000 .56. Bwen &ontributes the propert4 to 5idwest !orporation in ex&hange for 100 shares of newl4 issued 5idwest sto&). ;oes %e&tion $-1 appl4 to Bwen2s ex&hange= <hat is the amount of her reali7ed gain or loss= How mu&h is re&ogni7ed= Answer: %e&tion $-1 does not appl4 be&ause Bwen owns onl4 -01 of the 5idwest sto&) after the ex&hange and is not in &ontrol of 5idwest !orporation. Bwen has a reali7ed gain of ?,-'000 C?100'000 # ?1-'000)' all of whi&h must be re&ogni7ed.
age Ref.: !:"#1-@ Example !:"#1/

,/) Abb4 owns all 100 shares of Rent !orporation2s sto&)' valued at ?10'000. :art owns propert4 that has a ?1'-00 ad9usted basis and a ?10'000 .56. :art &ontributes the propert4 to Rent !orporation in ex&hange for 100 shares of newl4 issued Rent sto&). Abb4 transfers additional propert4 worth ?10'000 for an additional 10 shares of newl4 issued Rent sto&) too. ;oes %e&. $-1 appl4= Answer: :oth Abb4 and :art are transferors and %e&. $-1 does appl4. Geither Abb4 nor :art re&ogni7es an4 gain on the ex&hange.
age Ref.: !:"#1-' Example !:"#"0

/0) Anton' :ettina' and !aleb form !age !orporation. Ea&h &ontributes appre&iated propert4 worth ?10'000 for one#third of the !age sto&). :efore the ex&hange Anton arranges to sell his sto&) to ;arma as soon as he re&eives it. ;oes %e&. $-1 appl4= Answer: Go' this prearranged plan means Anton' :ettina' and !aleb do not have &ontrol immediatel4 after the ex&hange so %e&. $-1 does not appl4.
age Ref.: !:"#1(' Example !:"#"$

/1) %outh !orporation a&quires 100 shares of treasur4 sto&) for ?10'000. The next 4ear' %outh reissues the 100 shares for land having a ?1-'000 .56. <hat is the amount of gain or loss reali7ed b4 %outh !orporation' and how mu&h is re&ogni7ed= Answer: %outh reali7es a ?-'000 C?1-'000 # ?10'000) gain on the ex&hange. Gone of it is re&ogni7ed.
age Ref.: !:"#"0' Example !:"#"/

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/") A7ar' who owns 1001 of Hat !orporation' transfers land having a ?-0'000 .56 and a ?$0'000 ad9usted basis to Hat. 8n return A7ar re&eives additional shares of Hat &ommon sto&) having a ?*0'000 .56 and !ap !orporation &ommon sto&) having a ?10'000 .56. The !ap !orporation &ommon sto&)' a &apital asset' has a ?"'-00 basis on Hat2s boo)s. <hat is A7ar2s reali7ed and re&ogni7ed gain= ;oes Hat !orporation re&ogni7e a gain on the sto&) transfer to A7ar= Answer: A7ar reali7es a ?"0'000 C?*0'000D?10'000#?$0'000) gain on the land transfer' of whi&h ?10'000 must be re&ogni7ed. Hat !orporation re&ogni7es a ?3'-00 &apital gain C?10'000 # ?"'-00) when transferring the !ap !orporation sto&) to A7ar.
age Ref.: !:"#"0@ Example !:"#$0

/$) Oolanda transfers land' a &apital asset' having a ?30'000 ad9usted basis and a ?1"-'000 .56 and ?10'000 &ash to >a77 !orporation in ex&hange for all its sto&). >a77 !orporation assumes the ?100'000 mortgage on the land. The mortgage assumption has no tax avoidan&e purpose and has the requisite business purpose. <hat is the amount of Oolanda2s reali7ed gain or loss= How mu&h is re&ogni7ed and what is its &hara&ter= <hat is Oolanda2s basis in the >a77 sto&)= Answer: Oolanda has a reali7ed gain of ?--'000 C?1"-'000 # ?30'000). Even though Oolanda does not re&eive an4 boot' she must re&ogni7e a ?"0'000 C?100'000 # ?,0'000) &apital gain' the amount b4 whi&h the liabilities assumed b4 >a77 !orporation ex&eed the basis of the land and the &ash transferred b4 Oolanda. Oolanda2s basis in the >a77 sto&) is ?0. Oolanda2s basis in the land transferred ? lus: !ash transferred Bain re&ogni7ed 5inus: :oot re&eived Cliabilities assumed b4 >a77) Oolanda2s basis in the >a77 %to&)
age Ref.: !:"#"$' Example !:"#$-

30'000 10'000 "0'000 C?100'000) ? #0#

/*) Noe Ann transfers ma&hiner4 having a ?$('000 ad9usted basis and a ?30'000 .56 for all 100 shares of Neema !orporation2s sto&). :efore the transfer' Noe Ann used the ma&hiner4 in her business. %he originall4 paid ?-0'000 for the ma&hiner4 and &laimed ?1*'000 of depre&iation before transferring the ma&hiner4. Noe Ann re&aptures no depre&iation on the transfer and the re&apture potential is transferred to Neema !orporation. Neema sells the ma&hine for ?(('000 after it had depre&iated the ma&hine an additional ?*'000. <hat is Neema2s gain on the ma&hine and what is its &hara&ter= Answer: Neema must re&ogni7e a ?$*'000 C?(('000#?$"'000) gain on the sale. Ef this gain' ?1,'000 is ordinar4 in&ome re&aptured under %e&. 1"*-. The remaining ?1('000 is %e&. 1"$1 gain.
age Ref.: !:"#"-' !:"#"(' Example !:"#$/

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/-) En >ul4 /' "00,' Tom pur&hased a &omputer Cfive#4ear propert4 for 5A!R% purposes) for ?('000' whi&h he used in his sole proprietorship. He &laimed ?1'"00 C0."0M?('000) of depre&iation for "00,. En .ebruar4 /' "00/' he transfers the &omputer and other assets of his sole proprietorship to :rewer !orporation in ex&hange for :rewer sto&) in a transfer qualif4ing under %e&. $-1. <hat is the amount of depre&iation for "00, &laimed b4 Tom= <hat is the amount of depre&iation for "00/ &laimed b4 :rewer !orporation= <hat is :rewer2s basis in the &omputer on the date of transfer= Answer: :rewer !orporation must use the same 5A!R% re&over4 period and method that Tom used. ;epre&iation for "00/ is ?1'/"0 C0.$"M?('000)' whi&h is allo&ated between Tom and :rewer !orporation. The &omputer is &onsidered to be held b4 Tom for one month and b4 :rewer !orporation for 11 months. Therefore Tom &laims ?1(0 and :rewer &laims ?1'3(0 in depre&iation for "00/. En .ebruar4 /' "00/' :rewer2s basis in the &omputer is ?*'(*0. Eriginal &ost of &omputer 5inus "00, depre&iation ta)en b4 Tom "00/ depre&iation ta)en b4 Tom Ad9usted basis on transfer date
age Ref.: !:"#"(@ Example !:"#*0

?('000 C1'"00) C 1(0) ?*'(*0

/() Reba' a &ash basis a&&ountant' transfers all of the assets and liabilities of her pra&ti&e to Able !orporation in ex&hange for all of Able !orporation2s sto&). The assets in&lude ?"0'000 of a&&ounts re&eivable. <hat is the !orporation2s basis in the re&eivables= <ill the &orporation be taxed on the re&eivables' as the4 are &olle&ted= Answer: Able !orporation2s basis in the re&eivables is 7ero and the &orporation will in&lude the re&eivables in in&ome' as the4 are &olle&ted.
age Ref.: !:"#"3@ Example !:"#*"

/3) Ra !orporation issues a twent4#4ear obligation at its ?1'000 fa&e amount. Rames pur&hases the obligation for ?1'000 on the issue date. ;ue to a de&line in interest rates' Ra &alls the obligation b4 pa4ing ?1'010 to ea&h of the holders of the twent4#4ear obligations. <hat is the tax treatment of the ?1'010 b4 Ra and Rames= Answer: Ra will re&ogni7e a ?10 &apital gain on the repa4ment of the debt instrument. Rames will dedu&t the ?10 premium paid as interest expense.
age Ref.: !:"#"/' Example !:"#*$

/,) The !it4 of %eattle gives ;ot&om !orporation ?1"0'000 &ash and land worth ?"00'000 to indu&e it to relo&ate to %eattle. ;ot&om !orporation did not spend the &ash during the 1" months following the &ontribution. <hat are the tax &onsequen&es to ;ot&om !orporation with respe&t to the &ontribution= Answer: Go in&ome is re&ogni7ed. ;ot&om !orporation2s basis in the land is ?0' and it must redu&e the basis of other assets b4 ?1"0'000.
age Ref.: !:"#$1@ Example !:"#*-

//) The !it4 of roviden&e donates land worth ?1"-'000 to Triple A !orporation to indu&e it to lo&ate in roviden&e and provide 9obs for its &iti7ens. How mu&h gross in&ome must Triple A !orporation re&ogni7e be&ause of the land &ontribution' and what is the land2s basis to Triple A !orporation= Answer: The &orporation re&ogni7es no in&ome and the land has a ?0 basis.
age Ref.: !:"#$1

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100) Gi))i ex&hanges propert4 having a ?"0'000 ad9usted basis and a ?1('000 .56 for 100 shares of Gifti) sto&) in a transa&tion qualif4ing under %e&. $-1. The sto&) qualifies as %e&. 1"** sto&). Gi))i2s basis in her Gifti) sto&) is ?"0'000. 8f Gi))i sells her sto&) for ?-'000 what is the amount and &hara&ter of her loss= Answer: Gi))i has a ?1-'000 C?-'000#?"0'000) re&ogni7ed loss. Her ordinar4 loss under %e&. 1"** is ?11'000 C?-'000#?1('000 %e&. 1"** basis). The remaining ?*'000 loss is a &apital loss.
age Ref.: !:"#$"' !:"#$$' Example !:"#*3

101) ;arnell' who is single' ex&hanges propert4 having a ?(0'000 ad9usted basis and a ?-0'000 .56 for 1'000 shares of .ox !orporation sto&) in a transa&tion qualif4ing under %e&. $-1. The sto&) qualifies as %e&. 1"** sto&). 8f ;arnell sells his sto&) for ?$0'000' what is the amount and &hara&ter of his re&ogni7ed gain or loss= Answer: ;arnell has a ?"0'000 ordinar4 loss and a ?10'000 &apital loss. ro&eeds Ad9usted :asis in the sto&) Reali7ed loss ?$0'000 ?(0'000 ?$0'000.

.or %e&. 1"** purposes' his basis is ?-0'000. Therefore onl4 ?"0'000 C?$0'000 # ?-0'000) qualifies as an ordinar4 loss. The remaining ?10'000 is a &apital loss.
age Ref.: !:"#$"' !:"#$$' Example !:"#*3

10") Bene pur&hases land five 4ears ago as an investment. The land &ost him ?"00'000 and is now worth ?-$0'000. Bene plans to transfer the land to ;ee !orporation' whi&h will subdivide the land and sell individual par&els. ;ee !orporation2s profits on the land will be ordinar4 in&ome. <hat are the tax &onsequen&es of the asset transfer and land sales if Bene &ontributes the land to ;ee !orporation in ex&hange for all of its sto&)= <hat alternative methods &an be used to stru&ture the transa&tion to a&hieve better tax &onsequen&es= Answer: Bene re&ogni7es no gain when he transfers the land to ;ee !orporation. ;ee !orporation2s basis in the land will be ?"00'000. All gain on the subsequent sale will be ordinar4 in&ome to ;ee !orporation. This alternative results in the pre#&ontribution gain that a&&rued prior to Bene2s transfer and the post#&ontribution profit originating from subdividing the land being taxed at ;ee !orporation2s marginal tax rate. Bene &ould transfer the land to ;ee !orporation in ex&hange for sto&) and ?$$0'000 of debt instruments. 8n this &ase' Bene would re&ogni7e ?$$0'000 of long#term &apital gain and ;ee !orporation2s basis in the land would be ?-$0'000. The ?$$0'000 of pre#&ontribution &apital gain Cnet of an4 &apital losses that Bene has re&ogni7ed) is taxed at a 1-1 &apital gains tax rate.
age Ref.: !:"#$-#!:"#$(

10$) %evers !orporation emplo4s %usan as its legal &ounsel. Her annual &ompensation from %evers !orporation is ?100'000. %evers !orporation is experien&ing finan&ial problems' and %usan lends the &orporation ?-0'000 in "00( in an attempt to help it through its finan&ial diffi&ulties. %evers !orporation subsequentl4 de&lares ban)rupt&4' and in "00, %usan and the other &reditors re&eive 10 &ents on ea&h dollar the4 are owed. <hat is the amount and &hara&ter of %usan2s loss= Answer: %in&e %usan is not a shareholder in %evers !orporation' her loss of ?*-'000 C?-0'000M./0) is an ordinar4 loss and is full4 dedu&tible in the 4ear she in&urs the loss.
age Ref.: !:"#$$' !:"#$*' Example !:"#*,

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10*) The tax disadvantages of the ! &orporation form of doing business in&lude Adouble taxationA. <hat is meant b4 the term Adouble taxationA as used in this &ontext= Answer: ;ouble taxation o&&urs when &orporate earnings are distributed as dividends to the shareholders. %in&e the &orporate earnings have alread4 been taxed at the &orporate level' the sto&)holders must pa4 personal in&ome tax as a se&ond tax when the earnings are distributed as dividends. ;ouble taxation &an also o&&ur when the sto&) is sold or ex&hanged and the portion of the gain attributable to the a&&umulated earnings is taxed as &apital gain.
age Ref.: !:"#(

10-) ;is&uss the impa&t of the &ontribution of &ash as part of a %e&. $-1 ex&hange. Answer: !ash is treated as propert4 when it is &ontributed. Go gain or loss is re&ogni7ed b4 the transferor when a &ontribution of &ash is made. %to&) re&eived b4 a transferor who &ontributes &ash for the sto&) has his shares &ounted for purposes of the ,0 per&ent &ontrol test.
age Ref.: !:"#1"

10() This 4ear' >ohn' 5eg' and Faren form .rost !orporation. >ohn &ontributes land pur&hased as an investment four 4ears ago for ?1-'000 that has a ?$0'000 .56 in ex&hange for $0 shares of .rost sto&). 5eg &ontributes ma&hiner4 C%e&. 1"$1 propert4) pur&hased four 4ears ago and used in her business having a ?$-'000 ad9usted basis and a ?$0'000 .56 in ex&hange for $0 shares of .rost sto&). Faren &ontributes servi&es worth ?"0'000 in ex&hange for "0 shares of .rost sto&). a. <hat is the amount of >ohn2s re&ogni7ed gain or loss= b. <hat is >ohn2s basis in his .rost shares= <hen does his holding period begin= &. <hat is the amount of 5eg2s re&ogni7ed gain or loss= d. <hat is 5eg2s basis in her .rost shares= <hen does her holding period begin= e. How mu&h in&ome' if an4' must Faren re&ogni7e= f. <hat is Faren2s basis in her .rost shares= <hen does her holding period begin= g. <hat is .rost !orporation2s basis in the land and the ma&hiner4= <hen does its holding period begin= How does .rost !orporation treat the amount paid to Faren for her servi&es= Answer: a. %in&e %e&. $-1 does not appl4 be&ause "-1 C"0 shares out of ,0 total shares) of the sto&) is issued for servi&es' >ohn must re&ogni7e ?1-'000 of &apital gain. b. >ohn2s basis in his shares is ?$0'000 and his holding period begins on the da4 after the ex&hange date. &. 5eg re&ogni7es a ?-'000 %e&. 1"$1 loss. d. 5eg2s basis in her shares is ?$0'000 and her holding period begins on the da4 after the ex&hange date. e. Faren must re&ogni7e ?"0'000 of ordinar4 in&ome. f. Faren2s basis in her shares is ?"0'000. Her holding period begins on the da4 after the ex&hange date. g. .rost !orporation has a ?$0'000 basis in the land and a ?$0'000 basis in the ma&hiner4. 8ts holding period for ea&h asset begins on the da4 after the ex&hange date. The servi&es' if &apitali7ed' would have a ?"0'000 basis. The servi&es ma4 be amorti7able if the4 are organi7ational or start#up expenditures.
age Ref.: !:"#1"#!:"#"*

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103) This 4ear' >ohn' 5eg' and Faren form .rost !orporation. >ohn &ontributes land pur&hased as an investment four 4ears ago for ?"-'000 that has a ?$0'000 .56 in ex&hange for $0 shares of .rost sto&). 5eg &ontributes ma&hiner4 C%e&. 1"-1 propert4) pur&hased four 4ears ago and used in her business having a ?-0'000 ad9usted basis and a ?$0'000 .56 in ex&hange for $0 shares of .rost sto&). Faren &ontributes servi&es worth ?1-'000 and ?-'000 &ash in ex&hange for "0 shares of .rost sto&). a. <hat is the amount of >ohn2s re&ogni7ed gain or loss= b. <hat is >ohn2s basis in his .rost shares= <hen does his holding period begin= &. <hat is the amount of 5eg2s re&ogni7ed gain or loss= d. <hat is 5eg2s basis in her .rost shares= <hen does her holding period begin= e. How mu&h in&ome' if an4' must Faren re&ogni7e= f. <hat is Faren2s basis in her .rost shares= <hen does her holding period begin= g. <hat is .rost !orporation2s basis in the land and the ma&hiner4= <hen does its holding period begin= How does .rost !orporation treat the amount paid to Faren for servi&es= Answer: a. %in&e %e&. $-1 would appl4 to the ex&hange' >ohn would not re&ogni7e an4 gain or loss. b. >ohn2s basis is ?"-'000. His holding period begins in his 4ear of pur&hase four 4ears ago. &. 5eg does not re&ogni7e an4 loss. d. 5eg2s basis is ?-0'000. Her holding period begins in her 4ear of pur&hase four 4ears ago. e. Faren must re&ogni7e ?1-'000 of ordinar4 in&ome. f. Faren2s basis for her shares is ?"0'000 and her holding period begins on the da4 after the ex&hange date. g. .rost !orporation2s basis in the land and ma&hiner4 are ?"-'000 and ?$0'000' respe&tivel4. :e&ause 5et &ontributed loss propert4' unless an ele&tion is made' the basis in the loss propert4 must be redu&ed to .56 b4 the &orporation. .rost2s holding period for the land begins four 4ears ago. .rost2s holding period for the ma&hiner4 begins the da4 after transfer to .rost !orporation. The servi&es' if &apitali7ed' would have a ?1-'000 basis. The servi&es ma4 be amorti7able if the4 are organi7ational or start#up expenditures.
age Ref.: !:"#1"#!:"#"*

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10,) En 5a4 1 of the &urrent 4ear' Fiara' 6i&tor' am' and >oe form Gew&o !orporation with the following investments: ropert4 Transferred Transferor Fiara Asset +and :uilding 5ortgage and the land P building Equipment 6an A&&ounting %ervi&es :asis to Transferor ?1"'000 $,'000 (0'000 "-'000 1-'000 #0# .56 ?$0'000 30'000 (0'000 *0'000 10'000 10'000 Gumber of &ommon shares issued *00 $00 -0 100

6i&tor am >oe

Fiara pur&hased the land and building several 4ears ago for ?1"'000 and ?-0'000' respe&tivel4. Fiara has &laimed straight#line depre&iation on the building. 6i&tor also re&eived a Gew&o !orporation note for ?10'000 due in three 4ears. The note bears interest at a rate a&&eptable to the 8R%. 6i&tor pur&hased the equipment three 4ears ago for ?-0'000. am also re&eives ?-'000 &ash. am pur&hased the van two 4ears ago for ?"0'000. a. ;oes the transa&tion satisf4 the requirements of %e&. $-1= b. <hat are the amounts and &hara&ter of the reorgani7ed gains or losses to Fiara' 6i&tor' am' >oe and Gew&o !orporation= &. <hat is ea&h shareholder2s basis for his or her Gew&o %to&)= <hen does the holding period for the sto&) begin= d. <hat is Gew&o !orporation2s basis for its propert4 and servi&es= <hen does its holding period begin for ea&h propert4= Answer: a. Oes' the transa&tion meets the requirements of %e&. $-1. Transferors of propert4 CFiara' 6i&tor' P am) own ,,."1 C3-0L,-0 K 0.,,") of the Gew&o sto&). b. Fiara must re&ogni7e a ?10'000 gain' the amount b4 whi&h the ?(0'000 mortgage assumed b4 Gew&o ex&eeds the ?-0'000 basis C?1"'000 D ?$,'000) of all the assets transferred b4 Fiara. The &hara&ter of the gain is %e&. 1"$1 gain. 6i&tor must re&ogni7e ?10'000 of gain Cthe lesser of his reali7ed gain of ?1-'000 on the boot re&eived of ?10'000). The gain is ordinar4 in&ome re&aptured under %e&. 1"*-. am reali7ed a ?-'000 loss' whi&h is not re&ogni7ed even though she re&eived &ash. >oe must re&ogni7e ?10'000 ordinar4 in&ome on &ompensation for his servi&es. Gew&o !orporation re&ogni7es neither a gain nor a loss on the issuan&e of its sto&) or note. &. Fiara2s basis is 7ero C?1"'000 D ?$,'000 # ?(0'000 D ?10'000 gain). Her holding period in&ludes her holding period for the land and building. 6i&tor2s basis is ?"-'000 C?"-'000 D ?10'000 gain # ?10'000 boot). His holding period in&ludes his holding period for the equipment. am2s basis for her sto&) is ?10'000 C?1-'000 # ?-'000 boot). Her holding period in&ludes the holding period for the van. >oe2s basis for his sto&) is ?10'000. His holding period begins on the da4 after the ex&hange. d. Gew&o !orporation2s basis is: +and ?1-'000 :uilding ?*-'000 I?1"'000 D C0.$0M?10'000)J I?$,'000 D C0.30 M ?10'000)J

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The gain is allo&ated between the two assets based on their relative .56s. The holding period in&ludes Fiara2s holding period. Equipment: ?$-'000 C?"-'000 D ?10'000). The holding period in&ludes 6i&tor2s holding period. 6an: ?1-'000. The holding period in&ludes am2s holding period. The ?10'000 in a&&ounting servi&es is dedu&tible b4 Gew&o !orporation if re&eived subsequent to the start of operations. 8f the4 are pre#operating expenses' the4 should be anal47ed under %e&. "*,.
age Ref.: !:"#1"#!:"#"3

10/) +4nn transfers propert4 with a ?-('000 ad9usted basis and a ?100'000 .56 to .lorida !orporation for 3- shares of .lorida sto&). .red' +4nn2s father' transfers propert4 with a ?(*'000 ad9usted basis and a ?100'000 .56 to .lorida !orporation for the remaining "shares of .lorida sto&). a. <hat is the amount of ea&h transferor2s gain or loss= b. <hat is +4nn2s basis for her .lorida sto&)= &. <hat is .red2s basis for his .lorida sto&)= Answer: a. Geither +4nn nor .red re&ogni7es an4 gain or loss on the ex&hange sin&e %e&. $-1 applies. b. %in&e the ex&hange is disproportionate' it is li)el4 that .red has made a gift of "- shares of .lorida sto&) to +4nn. +4nn2s basis in her 3- shares is ?,,'000 C?-('000 basis in propert4 transferred b4 +4nn D ?$"'000 basis in the "- shares re&eived from .red). CThis answer assumes no gift taxes were paid b4 .red on the transfer.) &. .red2s basis in his "- shares is ?$"'000 I?(*'000 # C0.-0 M ?(*'000)J.
age Ref.: !:"#1-

110) Gorman transfers ma&hiner4 that has a ?*-'000 basis and a ?10-'000 .56 and ?$0'000 in mone4 to Elnor !orporation in ex&hange for -0 shares of Elnor sto&). The ma&hiner4' used in Gorman2s business' originall4 &ost him ?1-0'000 and is sub9e&t to a ?,*'000 liabilit4 whi&h Elnor !orporation assumes. Fate ex&hanges ?-1'000 &ash for the remaining -0 shares of Elnor sto&). a. <hat are the amount and &hara&ter of Gorman2s re&ogni7ed gain or loss= b. <hat is his basis in the Elnor sto&)= &. <hat is Elnor2s basis in the ma&hiner4= d. <hat are the amount and &hara&ter of Fate2s re&ogni7ed gain or loss= e. <hat is Fate2s basis in the Elnor sto&)= f. <hen do Gorman and Fate2s holding periods for their sto&) begin= Answer: a. Gorman2s reali7ed gain is ?(0'000 IC?-1'000 D ?,*'000) # C?*-'000 D ?$0'000)J. He must re&ogni7e ?/'000 of gain' the amount of whi&h the liabilit4 transferred C?,*'000) ex&eeds the basis of all propert4 transferred b4 Gorman C?*-'000 D ?$0'000). b. Gorman2s basis for his Elnor sto&) is 0 C?*-'000 D ?$0'000 # ?,*'000 D ?/'000 gain). &. Elnor2s basis in the ma&hiner4 is ?-*'000 C?*-'000 D ?/'000). d. Fate does not re&ogni7e an4 gain or loss. e. Fate2s basis is ?-1'000. f. Gorman2s holding period in&ludes his holding period for the ma&hiner4. Fate2s holding period starts on the da4 after the ex&hange.
age Ref.: !:"#""#!:"#"*

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111) <hat is the impa&t on a transferor if a %e&. $-1 ex&hange involves the assumption of the shareholder2s liabilities b4 the &orporation= Answer: The general rule is that the assumption does not invalidate the %e&. $-1 ex&hange. The liabilities that are assumed are not &onsidered to be boot C%e&. $-3Ca)). 8f the assumption or a&quisition of an4 of the liabilities fails to have a business purpose or has a tax avoidan&e purpose' then all of the liabilities are &onsidered to be mone4 C%e&. $-3Cb)). Bain is re&ogni7ed equal to the lesser of the reali7ed gain or mone4 re&eived. 8f the amount of liabilities assumed or a&quired ex&eeds the ad9usted basis of the propert4 transferred' then gain must be re&ogni7ed in the amount of the ex&ess C%e&. $-3C&)).
age Ref.: !:"#""#!:"#"*

11") <hat is the tax treatment for a &ontribution of &apital to a &orporation b4 a nonshareholder= Answer: The &orporation does not re&ogni7e in&ome as a result of the &apital &ontribution. The basis of an4 propert4 &ontributed b4 a nonshareholder is 7ero. The basis of propert4 a&quired with a mone4 &ontribution made b4 a nonshareholder must be redu&ed b4 the amount of the &ontributed mone4 used towards the pur&hase. An4 mone4 that was &ontributed and not spent during the 1" months following the &ontribution redu&es the basis of other assets. The order of redu&tion is: .irst' depre&iable propert4@ then amorti7able propert4@ then depletable propert4@ and finall4 all other propert4.
age Ref.: !:"#$1

11$) <h4 would a transferor want to avoid the nonre&ognition of gain under %e&. $-1= How &an the nonre&ognition provision of %e&. $-1 be avoided= Answer: A transferor ma4 want the &orporation to have a higher basis in the propert4 transferred. A higher basis would allow greater depre&iation dedu&tions and redu&e the gain re&ogni7ed if the &orporation sells the propert4. The in&reased depre&iation andLor redu&ed gain ma4 be an advantage be&ause the &orporation ma4 be in a higher tax bra&)et than the transferor. A transferor2s gain also ma4 be a &apital gain that is redu&ed b4 a &apital loss so as to be tax#free. Gonre&ognition &an be avoided b4 selling the propert4 to the &orporation for &ash or &ash and debt. The ,01 &ontrol test ma4 be intentionall4 avoided b4 issuing propert4 for servi&es. Also' b4 using debt in an amount that ex&eeds the transferor2s basis or b4 having debt assumed or a&quired without a business purpose' the transferor &an be required to re&ogni7e gain.
age Ref.: !:"#$-

11*) ;is&uss the tax planning opportunities that are available in forming a &orporation when one of the parties owns propert4 that has a high basis and a low .56. Answer: The plan should be formulated to allow the &ontributor to avoid %e&. $-1 and be able to re&ogni7e the loss. This &an be done b4 having the transferor sell the propert4 to an unrelated part4 and then have the transferor &ontribute &ash. The transferor must be &areful to avoid the related part4 rules of %e&. "(3 whi&h &ould prevent the loss from being re&ogni7ed if the propert4 is sold dire&tl4 to the &orporation.
age Ref.: !:"#$*' !:"#$-

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11-) ;is&uss the 8R% reporting requirements under %e&. $-1. Answer: :oth the transferor # shareholders and the transferee &orporation must atta&h a statement to their tax returns for the period that in&ludes all the fa&ts pertinent to the ex&hange and dis&loses the date of the ex&hange. The transferor # shareholder statement would in&lude Q a des&ription of the propert4 transferred and its ad9usted basis to the transferor. Q a des&ription of the sto&) re&eived in the ex&hange in&luding its )ind' number of shares' and .56. Q a des&ription of the se&urities re&eived in the ex&hange' in&luding the prin&ipal amount' terms' and .56. Q the amount of mone4 re&eived. Q a des&ription of an4 other propert4 re&eived' in&luding its .56. Q a statement of the liabilities transferred to the &orporation' in&luding the nature of the liabilities' when and wh4 the4 were &reated' and the &orporate business reason for their transfer. The transferee &orporation statement would in&lude Q a &omplete des&ription of all propert4 re&eived from the transferors. Q the ad9usted basis of the propert4 to the transferors. Q a des&ription of the sto&) issued to the transferors. Q a des&ription of the se&urities issued to the transferors. Q the amount of mone4 distributed to the transferors. Q a des&ription of an4 other propert4 distributed to the transferors. Q information regarding the transferor2s liabilities that are assumed b4 the &orporation.
age Ref.: !:"#$(

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11() >ane and >oe plan to go into business together. The4 plan to in&orporate the business. <hat tax issues should the4 &onsider when de&iding whether or not to ele&t % &orporation status= Q Are their individual marginal tax rates lower or higher than a ! !orporation2s marginal tax rates= Q ;o the4 anti&ipate profits or losses in the first few 4ears of business= Q <ill the &orporation generate an4 &apital gains or losses= Q ;o the4 plan to withdraw mone4 from the &orporation= Q <ill the4 want or need fringe benefits= Q ;o the4 plan to use a &alendar 4ear end or a fis&al 4ear end= Answer: % &orporations generall4 are exempt from taxation. 8n&ome flows through and is taxed to the shareholders. The shareholders2 marginal tax rates ma4 be lower than a ! &orporation2s marginal tax rate. +osses flow through to shareholders and &an be used to offset in&ome earned from other sour&es unless limitations appl4. This feature is parti&ularl4 important to &orporations 9ust beginning their operations. assive loss and basis rules ma4 limit loss dedu&tions to shareholders. :e&ause in&ome' loss' and other pass through items retain their &hara&ter when the4 flow through to the shareholders' individual shareholders are taxed on &apital gains as though the individual earned the gains. An individual ma4 be able to offset those gains with &apital losses from other sour&es or have them taxed at the appropriate &apital gain tax rate. %hareholders generall4 &an &ontribute mone4 to or withdraw mone4 from an % &orporation without gain re&ognition. %hareholders are taxed onl4 on the annual in&ome or the % &orporation. !orporate profits are taxed onl4 at the shareholder level. %hareholders are taxed on all of an % &orporation2s &urrent 4ear profits whether those profits are distributed or not. Tax#free &orporate fringe benefits generall4 are not available to % &orporation shareholders who are emplo4ed b4 the business. .ringe benefits provided b4 an % &orporation are dedu&tible b4 the &orporation and taxable to the shareholder. % &orporations generall4 &annot defer in&ome b4 &hoosing a fis&al 4ear for the % &orporation other than a &alendar 4ear unless the % &orporation &an establish a business purpose for a fis&al 4ear or unless it ma)es a spe&ial ele&tion.
age Ref.: !:"#(' !:"#3

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113) 5i&hael &ontributes equipment with a ?"-'000 ad9usted basis and a ?*0'000 .56 to 5iller !orporation for "- of its -0 shares of sto&). His son 5i&hael >r.' &ontributes ?10'000 &ash for the remaining "- 5iller shares. <hat tax issues should 5i&hael and his son &onsider with respe&t to the sto&) a&quisitions= Answer: Q ;oes the propert4 transfer meet the %e&. $-1 requirements= Q Have 5i&hael and his son transferred propert4= Q Are the transferors in &ontrol of the &orporation following the transfer= Q ;o the transferors re&eive transferee &orporation sto&)= Q ;oes the propert4 &ontributionLre&eipt of sto&) as outlined in the fa&ts refle&t the true nature of the transa&tion= Er' has a gift or other event o&&urred= Q <hat is ea&h shareholder2s re&ogni7ed gain= Q <hat is ea&h shareholder2s basis for his sto&)= Q <hat is ea&h shareholder2s holding period for his sto&)= Q 8f a gift has o&&urred' has 5i&hael made a taxable gift to his son= CThis question &ould be rewritten for events other than a gift Ce.g.' repa4ment of a loan.) Q <hat is 5iller !orporation2s basis for the propert4 re&eived from 5i&hael= Q <hat is 5iller !orporation2s holding period for the propert4 re&eived from 5i&hael= The &ontribution is tax#free sin&e it meets all the %e&. $-1 requirements' and 5i&hael and 5i&hael' >r. own all the 5iller sto&). 5i&hael' >r. re&eives a disproportionate amount of sto&) when &ompared to his ?10'000 &apital &ontribution. 8t appears that the transa&tion should be re&ast so that 5i&hael re&eives *0 shares of sto&)' ea&h valued at ?1'000. He then gifts 1shares to 5i&hael' >r. The gift leaves ea&h shareholder with "- shares of sto&). Geither shareholder re&ogni7es an4 gain' and 5i&hael ta)es a ?"-'000 ad9usted basis for the *0 shares he re&eives. He re&ogni7es no gain on the transfer of 1- shares to 5i&hael' >r.' and ?/.$3- IC1-L*0) M ?"-'000J of his basis a&&ompanies the gifted shares. 5i&hael2s basis for his remaining "- shares is ?1-'("- C?"-'000 # ?/'$3-). 5i&hael' >r.2s basis for his "- shares is ?1/'$3- C?10'000 D ?/'$3-).
age Ref.: !:"#11#!:"#""

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11,) %tu <al)er has owned all "00 shares of +an&e !orporation2s sto&) for the past six 4ears. This 4ear' 5egan >ones &ontributes propert4 with a ?100'000 basis and a ?1(0'000 .56 for 1(0 newl4 issued +an&e shares. At the same time' %tu &ontributes ?$0'000 in &ash for $0 newl4 issued +an&e shares. <hat tax issues should 5egan and %tu &onsider with respe&t to the sto&) a&quisitions= Answer: Q ;oes the propert4 transfer meet the %e&. $-1 requirements= Q Have %tu and 5egan transferred propert4= Q ;oes the fa&t that %tu &ontrols +an&e !orporation prior to the transfer &hange the general %e&. $-1 rules= Q Are the transferors in &ontrol of the &orporation following the transfer= Q ;o the transferors re&eive transferee &orporation sto&)= Q <hat is ea&h shareholder2s re&ogni7ed gain= Q <hat is ea&h shareholder2s basis for his or her sto&)= Q <hat is ea&h shareholder2s holding period for his or her sto&)= Q ;oes +an&e !orporation re&ogni7e gain when it issues its sto&)= Q <hat is +an&e !orporation2s basis for the propert4 re&eived from 5egan= Q <hat is +an&e !orporation2s holding period for the propert4 re&eived from 5egan= The propert4 transfer meets all the %e&. $-1 requirements. %tu and 5egan are &onsidered to own all $/0 of the +an&e shares immediatel4 after the ex&hange. %tu2s &ontribution of &ash for sto&) is not &onsidered to be a nominal amount a&&ording to the 8R% rules for private letter rulings Ci.e.' it equals or ex&eeds 101 of the value of %tu2s prior sto&) holdings) and permits his sto&) to be &ounted towards the ,01 minimum sto&) ownership for &ontrol. 5egan re&ogni7es no gain on the asset transfer and ta)es a ?100'000 basis for the +an&e shares she re&eives. The holding period for the +an&e shares in&ludes her holding period for the propert4 transferred. +an&e re&ogni7es no gain when it issues its sto&) and ta)es a ?100'000 basis for the propert4.
age Ref.: !:"#11#!:"#""

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11/) En April " of the &urrent 4ear' >ana transfers land with a basis of ?1*0'000 and a fair mar)et value of ?1"0'000 to Amish !orporation in ex&hange for all of its sto&). %he had originall4 a&quired the land on ;e&ember 1' "000. <hat tax issues rise from the ex&hange= Answer: Q ;oes the propert4 transfer meet the %e&. $-1 requirements= Q Has >ana transferred propert4= Q 8s >ana in &ontrol of the &orporation following the transfer= Q <hat is >ana2s re&ogni7ed gain= Q <hat is >ana2s basis for her sto&)= Q %hould >ana ele&t to ta)e a redu&ed basis in the sto&) so that Amish will have a ?1*0'000 basis in the land= Q <hat is >ana2s holding period for her sto&)= Q ;oes Amish !orporation re&ogni7e gain when it issues its sto&)= Q <hat is Amish !orporation2s basis for the propert4 re&eived from >ana= Q <hat is Amish !orporation2s holding period for the propert4 re&eived from >ana= The propert4 transfer meets all the %e&. $-1 requirements. Geither >ana nor Amish will have gain or loss on the ex&hange. >ana &an ele&t to ta)e a basis of ?1"0'000 in the Amish sto&) and Amish will have a ?1*0'000 basis in the land. 8f no ele&tion is made' Amish will have a basis of ?1"0'000 in the land and >ana2s basis in the sto&) is ?1*0'000. 8f Amish has a basis of ?1"0'000 in the land' its holding period for the land will begin on the da4 after the ex&hange. 8f Amish ta)es >ana2s basis of ?1*0'000 and >ana redu&es her basis in the sto&)' Amish2s holding period for the land begins on ;e&ember "' "000. >ana2s holding period for the sto&) in&ludes the period for whi&h she held the land.
age Ref.: !:"#1/#!:"#"1

1"0) >oan transfers land Ca &apital asset) having a ?"0'000 ad9usted basis to >et !orporation in a transa&tion qualif4ing under %e&. $-1. 8n ex&hange' she re&eived -0 shares of >et !orporation &ommon sto&)' valued at ?-0'000' a ?1-'000 >et !orporation bond due in 10 4ears' and a ?10'000 >et !orporation note due in $ 4ears. <hat tax issues should >oan &onsider with respe&t to the transfer= a. <hat is the amount of >oan2s reali7ed gain or loss= <hat is the amount of >oan2s re&ogni7ed gain or loss= <hat is the &hara&ter of >oan2s re&ogni7ed gain or loss= b. <hat is >oan2s basis in her sto&)= <hat is >oan2s basis in the bond= <hat is >oan2s basis in the note= &. <hat is >et !orporation2s basis in the land= Answer: a. Amount reali7ed C?-0'000D?1-'000D?10'000) ?3-'000 5inus: :asis in land C "0'000) Reali7ed gain ?--'000 :oot re&eived Cbond and note) ?"-'000 Bain re&ogni7ed C&apital gain) ?"-'000 b. :asis of sto&) and ten#4ear bond: :asis of sto&): ?"0'000 D ?"-'000 # ?"-'000 K ?"0'000 :asis of bond: ?1-'000 C.56) :asis of short#term note: ?10'000 C.56). &. :asis of land to >et !orporation is: ?"0'000 D ?"-'000 K ?*-'000.
age Ref.: !:"#13#!:"#1/

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1"1) %everal 4ears ago' >ohn a&quired "00 shares of >erse4 !orporation sto&) dire&tl4 from the &orporation for ?1-0'000 in &ash. This 4ear' he sold the sto&) to :ill for ?,-'000. <hat tax issues should >ohn &onsider with respe&t to the sto&) sale= Answer: Q <as the sto&) sold to a related part4 C:ill) as defined b4 %e&. "(3Cb)= 8f so' >ohn &annot re&ogni7e the loss' and the remaining issues do not have to be examined. Q 8s the sto&) a &apital asset= Q 8s >erse4 !orporation a qualif4ing small business &orporation= Q 8f a qualif4ing small business &orporation' does the sto&) qualif4 for %e&. 1"** sto&) treatment= Q 8f %e&. 1"** sto&)' what is >ohn2s marital and filing status= Q Has >ohn2s basis for the sto&) &hanged from its initial a&quisition &ost= Q <hat is the amount and &hara&ter of >ohn2s re&ogni7ed loss= >ohn2s sto&) sale results in a ?(-'000 C?1-0'000 # ?,-'000) long#term &apital loss provided the pur&haser was not a related part4. 8f the pur&haser is a related part4' %e&. "(3Ca) prevents >ohn from re&ogni7ing an4 loss. %in&e >ohn is the original holder of the sto&)' the loss ma4 be &hara&teri7ed as ordinar4 under %e&. 1"** if the various requirements of %e&. 1"** are satisfied.
age Ref.: !:"#$"' !:"#$$

1"") <ill' a shareholder in <ile4 !orporation' lent mone4 to the &orporation. The &orporation is unable to repa4 him. <hat tax issues should <ill &onsider with respe&t to the loan= Answer: Q <as the loan eviden&ed b4 a se&urit4= Q <as there a business purpose for ma)ing the loan= Q 8s the shareholder an emplo4ee of the &orporation= Q 8s so' was the loan made in his &apa&it4 as an emplo4ee or as a shareholder= Q <hat are the relative dollar amounts of his sto&) investment and his &ompensation= The t4pe of loss allowed if a shareholder lends mone4 to a &orporation whi&h is not repaid depends on the nature of the loan. 8f the unpaid loan was not eviden&ed b4 a se&urit4' it is either a business or nonbusiness bad debt. Gonbusiness bad debts are dedu&tible onl4 as short#term &apital losses when the debt is determined to be totall4 worthless. :usiness bad debts are dedu&tible as ordinar4 dedu&tions without limit when the4 are either partiall4 or totall4 worthless. The 8R% generall4 treats a loan made b4 a shareholder to a &orporation in &onne&tion with his sto&) investment as a nonbusiness a&tivit4. 8f the loan is made to prote&t the shareholder2s emplo4ment with the &orporation' it ma4 be treated as an ordinar4 loss under the business bad debt rules.
age Ref.: !:"#$$' !:"#$*

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1"$) %arah has advan&ed mone4 to her &orporation. <hat tax issued should she &onsider with respe&t to this mone4= Answer: Q 8s it equit4 &apital or debt= Q 8s there a written un&onditional promise to pa4 on demand or on a spe&ifi& date a &ertain sum of mone4 in return for an adequate &onsideration in mone4 or mone42s worth' and to pa4 a fixed interest rate= Q 8s the debt subordinate to or preferred over other indebtedness of the &orporation= Q <hat is the ratio of debt to equit4= Q 8f debt' is the debt &onvertible into sto&)= Q <hat is the relationship between holdings of sto&) in the &orporation and holdings of the interest in question= 8t is important to distinguish between &apital and debt. 8nterest paid with respe&t to a debt instrument is dedu&tible b4 the pa4or &orporation whereas dividends paid are not.
age Ref.: !:"#",' !:"#"/

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