Homework Assignment for Chapter 18

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Jane and Walt form Yellow Corporation. Jane transfers equipment worth $950,000 (basis of $200,000) and
cash of $50,000 to Yellow Corporation for 50% of its stock. Walt transfers a building and land worth
$1,050,000 (basis of $400,000) for 50% of Yellows stock and $50,000 in cash.
a. Jane recognizes no gain; Walt recognizes gain of $50,000.
b. Jane recognizes a gain of $50,000; Walt has no gain.
c. Neither Jane nor Walt recognizes gain.
d. Jane recognizes a gain of $750,000; Walt recognizes gain of $650,000.
e. None of the above.
____ 2. Tom and George form Swan Corporation with the following investments: Tom transfers machinery worth
$100,000 (basis of $40,000), while George transfers land worth $90,000 (basis of $20,000) and services
rendered in organizing the corporation worth $10,000. Each is issued 25 shares in Swan Corporation. With
respect to the transfers:
a. Tom has no recognized gain; George recognizes gain of $80,000.
b. Neither Tom nor George recognizes gain.
c. Swan Corporation has a basis of $30,000 in the land.
d. George has a basis of $30,000 in the shares of Swan Corporation.
e. None of the above.
____ 3. Ann transferred land worth $200,000, with a tax basis of $40,000, to Brown Corporation, an existing entity,
for 100 shares of its stock. Brown Corporation has two other shareholders, Bill and Bob, each of whom holds
100 shares. With respect to the transfer:
a. Ann has no recognized gain.
b. Brown Corporation has a basis of $160,000 in the land.
c. Ann has a basis of $200,000 in her 100 shares in Brown Corporation.
d. Ann has a basis of $40,000 in her 100 shares in Brown Corporation.
e. None of the above.
____ 4. Tim, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly
created Wren Corporation.

Adjusted Fair Market

Basis Value
Cash $ 20,000 $ 20,000
Building 110,000 160,000
Mortgage payable (secured by the building and held for
15 years) 135,000 135,000

With respect to this transaction:

a. Wren Corporations basis in the building is $110,000.
b. Tim has no recognized gain.
c. Tim has a recognized gain of $25,000.
d. Tim has a recognized gain of $5,000.
e. None of the above.
____ 5. Kim owns 100% of the stock of Cardinal Corporation. In the current year Kim transfers an installment
obligation, tax basis of $30,000 and fair market value of $200,000, for additional stock in Cardinal worth
$200,000.
 a. Kim recognizes no taxable gain on the transfer.
b. Kim has a taxable gain of $170,000.
c. Kim has a taxable gain of $180,000.
d. Kim has a basis of $200,000 in the additional stock she received in Cardinal Corporation.
e. None of the above.
____ 6. Rick transferred the following assets and liabilities to Warbler Corporation.

Adjusted Fair Market

Basis Value
Building $210,000 $225,000
Equipment 45,000 75,000
Automobile 15,000 30,000
Mortgage (held for four years) on building 30,000 30,000

In return Rick received $75,000 in cash plus 90% of Warbler Corporations only class of stock outstanding
(fair market value of $225,000).
a. Rick has a recognized gain of $60,000.
b. Rick has a recognized gain of $75,000.
c. Ricks basis in the stock of Warbler Corporation is $270,000.
d. Warbler Corporation has the same basis in the assets received as Rick does in the stock.
e. None of the above.
____ 7. Dawn, a sole proprietor, was engaged in a service business and reported her income on a cash basis. Later, she
incorporates her business and transfers the assets of the business to the corporation in return for all the stock
in the corporation plus the corporations assumption of the liabilities of her proprietorship. All the receivables
and the unpaid trade payables are transferred to the newly formed corporation. The assets of the
proprietorship had a basis of $105,000 and fair market value of $300,000. The trade accounts payable totaled
$25,000. There was a note payable to the bank in the amount of $95,000 that the corporation assumes. The
note was issued for the purchase of computers and other business equipment.
a. Dawn has a gain on the transfer of $15,000.
b. The basis of the assets to the corporation is $300,000.
c. Dawn has a basis of $10,000 in the stock she receives.
d. Dawn has a zero basis in the stock she receives.
e. None of the above.
____ 8. Kirby and Helen form Red Corporation. Kirby transfers property, basis of $20,000 and value of $300,000, for
100 shares in Red Corporation. Helen transfers property, basis of $40,000 and value of $280,000, and
provides legal services in organizing the corporation. The value of her services is $20,000. In return Helen
receives 100 shares in Red Corporation. With respect to the transfers:
a. Kirby will recognize gain.
b. Helen will not recognize gain.
c. Red Corporation will have a basis of $280,000 in the property it acquired from Helen.
d. Red will have a business deduction of $20,000.
e. None of the above.
____ 9. Earl and Mary form Crow Corporation. Earl transfers property, basis of $200,000 and value of $1,600,000, for
50 shares in Crow Corporation. Mary transfers property, basis of $80,000 and value of $1,480,000, and agrees
to serve as manager of Crow for one year; in return Mary receives 50 shares of Crow. The value of Marys
services is $120,000. With respect to the transfers:
a. Mary will not recognize gain.
b. Earl will recognize a gain of $1,400,000.
c. Crow Corporation has a basis of $1,480,000 in the property it received from Mary.
d. Crow will have a business deduction of $120,000 for the value of the services Mary will
 render.
e. None of the above.
____ 10. Four individuals form Chickadee Corporation under 351. Two of these individuals, Jane and Walt, made the
following contributions:

Adjusted Fair Market

Basis Value
From Jane
Cash $360,000 $360,000
Patent -0- 40,000

From Walt
Equipment (depreciation claimed of $100,000) 240,000 370,000

Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.
a. Jane must recognize income of $40,000; Walt has no income.
b. Neither Jane nor Walt recognize income.
c. Walt must recognize income of $130,000; Jane has no income.
d. Walt must recognize income of $100,000; Jane has no income.
e. None of the above.
____ 11. Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that
become worthless in the current year.
a. Wren Corporation is not permitted a deduction for the loans.
b. The loans result in a nonbusiness bad debt deduction to Wren Corporation.
c. The loans provide Wren Corporation with a business bad debt deduction.
d. None of the above.
____ 12. Shawn transfers property (basis of $40,000 and fair market value of $35,000) to Condor Corporation in
exchange for 1244 stock. The transfer qualifies as a nontaxable exchange under 351; therefore, Shawns
basis in the Condor stock is $40,000. Five years later, Shawn sells the Condor stock for $25,000. With respect
to the sale, Shawn has:
a. An ordinary loss of $15,000.
b. An ordinary loss of $10,000 and a capital loss of $5,000.
c. A capital loss of $15,000.
d. A capital loss of $10,000 and an ordinary loss of $5,000.
e. None of the above.