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1

Which statement best describes the concept of realization as it applies to gain or loss?


A. Realization is the recording of gain or loss on a tax return.

B. Realization is the result of an exchange of property rights in a transaction.

C. Realization is the excess of amount realized over adjusted basis.

D. Realization is the excess of adjusted basis over amount realized.

B. Realization is the result of an exchange of property rights in a transaction.

Realization occurs when a person engages in a transaction.

2

Which of the following amounts is not included in the computation of amount realized in an exchange?


A. Cash received

B. Fair market value of property received

C. Selling expenses

D. Adjusted basis of property transferred

D. Adjusted basis of property transferred.

The adjusted basis of property transferred is subtracted from the amount realized to compute gain or loss realized.

3

Which of the following amounts is not included in the computation of a property's adjusted basis in an exchange?


A. Selling expenses incurred by the buyer

B. Acquisition cost of the buyer

C. Capital improvements made to the property by the buyer

D. Depreciation of the property by the buyer

A. Selling expenses incurred by the buyer.

Selling expenses incurred by the buyer reduce the amount realized in the exchange.

4

Which of the following statements best describes the tax law approach to recognizing gain or loss realized in an exchange?


A. Gain and loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

B. Gain and loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code.

C. Gain realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but loss realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

D. Loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code, but gain realized is not recognized unless specifically stated otherwise in the Internal Revenue Code.

B. Gain and loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code.

The general rule is that gain or loss realized is recognized unless otherwise specifically stated in the Internal Revenue Code.

5

Which of the following requirements do not have to be met in a section 351 transaction?


A. Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred.

B. In the aggregate, the transferors of property to the corporation must collectively control the corporation immediately after the transfers.

C. Only property transferred to a corporation is eligible for deferral.

D. All transfers of property to a corporation must be made simultaneously to qualify for deferral.

A. Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred.

The control test under section 351 applies in the aggregate.

6

Roberta transfers property with a tax basis of $400 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $350 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is the amount realized by Roberta in the exchange?


A. $500

B. $400

C. $350

D. $250

A. $500

$350 fair market value of the stock received plus $150 from the liability assumed by the corporation.

7

Inez transfers property with a tax basis of $200 and a fair market value of $300 to a corporation in exchange for stock with a fair market value of $250 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is the corporation's tax basis in the property received in the exchange?


A. $150

B. $200

C. $250

D. $300

B. $200

The corporation's basis equals Inez's tax basis (a carryover basis). Alternatively, the tax basis equals the property's fair market value of $300 less the gain deferred of $100.

8

Antoine transfers property with a tax basis of $500 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $550 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Antoine's tax basis in the stock received in the exchange?


A. $600

B. $550

C. $500

D. $450

D. $450


The shareholder's tax basis equals his tax basis in the property transferred (a substituted basis) less any liability assumed by the corporation. If Antoine sells the stock for $550, the gain recognized will be $100, an amount equal to the gain deferred of $100.

9

Camille transfers property with a tax basis of $800 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $850 and $350 in a transaction that qualifies for deferral under section 351. Camille also incurred selling expenses of $100. What is the amount realized by Camille in the exchange?


A. $1,200

B. $1,100

C. $850

D. $750

B. $1,100

$850 fair market value of the stock received plus $350 less $100 selling expenses.

10

Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?


A. $800

B. $600

C. $550

D. $450

C. $550

The corporation's basis in the property equals Carlos's tax basis of $500 (a carryover basis) plus gain recognized of $50. If the corporation sells the property for $800, it will recognize a gain of $250, an amount equal to the gain deferred on the transfer.

11

Roy transfers property with a tax basis of $800 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $400 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Roy's tax basis in the stock received in the exchange?


A. $800

B. $750

C. $700

D. $500

C. $700

The shareholder's tax basis equals his tax basis in the property transferred of $800 (a substituted basis) less the $50 liability assumed by the corporation less the fair market value of boot received. If Roy sells the stock for $400, the loss recognized will be $300, an amount equal to the loss deferred of $300.

12

Casey transfers property with a tax basis of $2,000 and a fair market value of $5,000 to a corporation in exchange for stock with a fair market value of $4,000 and $400 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $600 on the property transferred. Casey also incurred selling expenses of $300. What is the amount realized by Casey in the exchange?


A. $5,000

B. $4,700

C. $4,600

D. $4,200

B. $4,700

$4,000 fair market value of the stock received plus $400 plus $600 mortgage assumed less $300 selling expenses.

13

Tristan transfers property with a tax basis of $900 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $900 and $200 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?


A. $1,200

B. $1,100

C. $1,000

D. $900

B. $1,100

The corporation's basis in the property equals Tristan's tax basis of $900 (a carryover basis) plus gain recognized by Tristan of $200 (the lesser of the gain realized or the boot received). If the corporation sells the property for $1,200, it will recognize a gain of $100, an amount equal to the gain deferred on the transfer.

14

Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil's tax basis in the stock received in the exchange?


A. $6,000

B. $5,000

C. $4,000

D. $3,000

D. $3,000


The shareholder's tax basis equals her tax basis in the property transferred of $5,000 (a substituted basis) plus gain recognized of $1,000 less boot received of $2,000 less the $1,000 liability assumed by the corporation. If Sybil sells the stock for $3,000, no gain or loss will be realized.

15

Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?


A. $5,000

B. $4,000

C. $3,000

D. $2,000

B. $4,000

The shareholder's tax basis equals her tax basis in the property transferred of $5,000 (a substituted basis) less boot received of $500 less the $500 liability assumed by the corporation. If Ashley sells the stock for $2,000, a $2,000 loss will be recognized, an amount equal to the loss deferred of $2,000.

16

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle's tax basis in the stock received in the exchange?


A. $900

B. $850

C. $750

D. $700

D. $700

The shareholder's tax basis equals her tax basis in the property transferred of $800 (a substituted basis) plus gain recognized of $50 less cash received of $50 less the $100 liability assumed by the corporation. If Rachelle sells the stock for $750, the gain recognized will be $50, an amount equal to the gain deferred of $50.

17

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?


A. $900

B. $850

C. $800

D. $750

B. $850

The corporation's tax basis equals the shareholder's tax basis in the property transferred of $800 (a substituted basis) plus gain recognized of $50. If the corporation sells the property for $900, the gain recognized will be $50.

18

Which of the following statements best describes the concept of control as it applies to a section 351 transaction?


A. Control is defined as the ownership of 80 percent or more of a corporation's voting stock.

B. Control is defined as the ownership of 80 percent or more of the fair market value of a corporation's stock.

C. Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the fair market value of a corporation's stock.

D. Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the total number of shares of each class of nonvoting stock.

D. Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the total number of shares of each class of nonvoting stock.

19

Which of the following class of stock is not allowed to be used in a section 351 transaction?


A. Voting common stock

B. Voting preferred stock

C. Nonvoting preferred stock

D. All of these classes of stock can be used in a section 351 transaction.

D. All of these classes of stock can be used in a section 351 transaction.

Section 351 is flexible with respect to the stock issued by the transferee corporation, although the voting power test must be met by the transferor shareholders in the aggregate.

20

Which of the following statements best describes the impact of receiving boot in a section 351 transaction?


A. Boot received has no impact on the recognition of gain or loss realized in a section 351 transaction.

B. Boot received causes gain realized to be recognized, but not loss realized.

C. Boot received causes loss realized to be recognized, but not gain realized.

D. Boot received causes gain and loss realized to be recognized.

B. Boot received causes gain realized to be recognized, but not loss realized.

Boot received causes gain, but not loss, realized to be recognized in an amount not to exceed the gain realized.

21

Sami transferred property with a fair market value of $600 and a tax basis of $300 to a corporation in exchange for stock with a fair market value of $600. In addition, Sami received stock with a fair market value of $50 in exchange for services she provided to the corporation in the incorporation process. Which of the following statements best describes the tax result to Sami because of the exchanges?


A. Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

B. Sami will recognize $50 of compensation income, but she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

C. Sami will not recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

D. Sami will not recognize $50 of compensation income, and she cannot count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

A. Sami will recognize $50 of compensation income, but she can count the shares of stock she receives in exchange for services in determining if the control test is met under section 351.

Sami recognizes $50 of income from services because services are not considered property under §351. She can count the stock she receives for the services in determining if the control test is met because the value of the stock received in exchange for property is greater than 10 percent of the value of the services rendered.

22

Amy transfers property with a tax basis of $900 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $450 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is Amy's tax basis in the stock received in the exchange?


A. $900

B. $750

C. $650

D. $450

B. $750

The shareholder's tax basis equals her tax basis in the property transferred (a substituted basis) less any liability assumed by the corporation. If Amy sells the stock for $450, the loss recognized will be $300, an amount equal to the loss deferred of $300.

23

Which of the following statements best describes the tax results to a shareholder in a section 351 transaction when liabilities on property transferred to the corporation are assumed by the corporation?


A. Liabilities assumed by a corporation on a section 351 transfer are always treated as boot.

B. Liabilities assumed by a corporation on a section 351 transfer are never treated as boot.

C. Liabilities assumed by a corporation on a section 351 transfer are treated as boot if the total liabilities assumed exceed the total basis of the assets transferred.

D. Liabilities assumed by a corporation on a section 351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation.

D. Liabilities assumed by a corporation on a section 351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation.


§357(b) treats all liabilities assumed by a corporation as boot if any of the liabilities are assumed for a tax avoidance purpose or there is no business purpose for their assumption.

24

Which of the following statements best describes the "built-in loss" rules that apply to property transferred to a corporation under section 351?


A. If the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property's fair market value.

B. If the basis of a property transferred to a corporation under section 351 exceeds its fair market value, the corporation will always take a tax basis in the property equal to the property's tax basis in the hands of the shareholder.

C. If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate fair market value of the property.

D. If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate tax basis of the property.

C. If the aggregate basis of all property transferred to a corporation under section 351 exceeds its aggregate fair market value, the aggregate tax basis of the property in the hands of the corporation cannot exceed the aggregate fair market value of the property.

The built-in loss rules under §362(e) apply when the aggregate tax basis of property transferred to a corporation exceeds the aggregate fair market value of the property.

25

Which of the following statements best describes the tax consequences that arise from a contribution of capital to a corporation by an existing shareholder?


A. The shareholder recognizes gain and loss on the transfer and the corporation's basis in the property transferred equals its fair market value.

B. The shareholder does not recognize gain and loss on the transfer and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred.

C. The shareholder recognizes gain and loss on the transfer and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred.

D. The shareholder does not recognize gain and loss on the transfer and the corporation's basis in the property transferred equals zero.

B. The shareholder does not recognize gain and loss on the transfer and the corporation's basis in the property transferred equals the shareholder's basis in the property transferred.

The shareholder gets to add the basis of the property contributed to the stock basis in her existing stock in the corporation.

26

Which of the following statements best describes the tax benefits that arise from the sale of section 1244 stock?


A. Section 1244 allows an individual shareholder to exempt gain from sale of the stock from tax.

B. Section 1244 allows an individual shareholder to deduct all of the loss from sale of the stock as an ordinary loss in the year of the sale.

C. Section 1244 allows an individual shareholder to deduct up to $50,000 of the loss from sale of the stock as an ordinary loss in the year of the sale.

D. Section 1244 allows a corporate shareholder to deduct up to $50,000 of the loss from sale of the stock as an ordinary loss in the year of the sale.

C. Section 1244 allows an individual shareholder to deduct up to $50,000 of the loss from sale of the stock as an ordinary loss in the year of the sale.

§1244 applies only to individuals and limits the treatment of loss as ordinary to $50,000 ($100,000 if married filing jointly).

27

Which of the following statements does not describe a motivation by the buyer or seller in the acquisition or sale of a company?


A. Buyers generally prefer to buy assets because they can take a tax basis in the assets acquired equal to the assets' fair market value.

B. Buyers generally prefer to buy stock because they can take a tax basis in the underlying assets of the company acquired equal to the assets' fair market value.

C. Sellers generally prefer to sell assets in a tax-deferred reorganization to avoid higher tax rates imposed on gains from the sale of non-capital assets.

D. Sellers generally prefer to sell stock because they can recognize capital gain on the sale taxed at preferential rates.

B. Buyers generally prefer to buy stock because they can take a tax basis in the underlying assets of the company acquired equal to the assets' fair market value.

Buyers generally prefer to buy assets to get a step-up in basis in the assets.

28

Which of the following statements best describes a section 338 transaction?


A. A section 338 transaction is an election made by the buyer to treat a stock acquisition as an asset acquisition.

B. A section 338 transaction is an election made by the buyer to treat an asset acquisition as a stock acquisition.

C. A section 338 transaction is an election made by the seller to treat a stock acquisition as an asset acquisition.

D. A section 338 transaction is an election made by the seller to treat an asset acquisition as a stock acquisition.

A. A section 338 transaction is an election made by the buyer to treat a stock acquisition as an asset acquisition.

Section 338 is an election made by the buyer to treat a stock acquisition as an asset acquisition.

29

Which of the following statements best describes the tax consequences of a section 338 election?


A. Gain or loss is recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a stepped-up basis in the assets acquired.

B. Gain or loss is recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a carryover basis in the assets acquired.

C. Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a stepped-up basis in the assets acquired.

D. Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a carryover basis in the assets acquired.

A. Gain or loss is recognized by the acquired corporation on the deemed sale of its assets and the buyer gets a stepped-up basis in the assets acquired.

The tax benefits from a step-up in basis usually is negated by the immediate tax paid on the deemed sale of assets by the acquired corporation.

30

Which of the following statements best describes the continuity of interest principle as it applies to a tax-deferred acquisition?


A. Continuity of interest requires each shareholder to receive at least 40 percent of the consideration received in equity of the acquirer.

B. Continuity of interest requires shareholders in the aggregate to receive at least 40 percent of the consideration received in equity of the acquirer.

C. Continuity of interest requires each shareholder to receive at least 80 percent of the consideration received in equity of the acquirer.

D. Continuity of interest requires shareholders in the aggregate to receive at least 80 percent of the consideration received in equity of the acquirer.

B. Continuity of interest requires shareholders in the aggregate to receive at least 40 percent of the consideration received in equity of the acquirer.

Continuity of interest is evaluated in the aggregate. The regulations state that 40 percent equity is sufficient to meet the COI test.