C239 EXAMINATION QUESTIONS AND VERIFIED
ANSWERS
Sec. 351 - Transferor recognizes no gain/loss (deferred until sale or exchange) when they
transfer property to a corporation solely in exchange for stock if they are in control immediately
after transfer
Sec. 351 Property - Cash & almost any other assets (AR, Inventory, Equipment)
Sec. 351 Property Exclusions - Services exchanged for stock, indebtness not evidenced by
security, interest accrued after holding period
Sole Proprietorship Advantages - No entity taxation, usually lower tax rate,
contribute/withdraw w/out consequence, business loss can offest nonbusiness income
Sole Proprietorship Disadvantages - Profits taxed to owner, pays full amount of social
security taxes, no group health, must use same accounting period for personal/business
Partnership Advantages - Partnership pays no tax, no double taxation, partners can use
loses to offset other income, basis increases with share
Partnership Disadvantages - Profits are taxed to partners when earned, partner is not
considered an employee of partnership
C Corporation Advantages - Entity separate and distinct from owners, employed
shareholders are employees for tax purposes, shareholder employees entitles to benefits,
shareholders can exclude 50% of gain on stock held more than 5 years
C Corporation Disadvantages - Double taxation on distributions, shareholders can't
withdraw w/out recognizing income, Net Op loss/capital losses have no tax benefits
S Corporation Advantages - S Corp pays no tax, corp losses flow to shareholders, corp not
taxed on shareholder gains, shareholders can contribute/withdraw, profits taxed at shareholder
level, Shareholder basis increases with # of shares
S Corporation Disadvantages - Shareholders are taxed on all profits, tax burden is heavier
is exceeds C corp rate, can't defer income by choosing different fiscal year
Debt in Corporation Capital Structure Advantages - Corp can deduct interest paid on debt
& Shareholders don't recognize income in debt retirement
Debt in Corporation Capital Structure Disadvantages - Shareholder capital contributions
receive debt instrument in exchange, treated as boot & Shareholder recognizes gain (less of
FMV or realized), if debt becomes worthless loss is bad debt or capital loss
, US Production Activities Deduction - Sec. 199; 9% x lesser of 1) qualified production
activities income for the year or 2) taxable income before production; can't exceed 50% of W2
wages
Dividends Received Deduction - Deduction for dividends received from another
corporation; if corp owns less than 20% of other corp deduct 70%, more than 20% deduct 80%
Net Operating Loss (NOL) - Amount by which deduction exceeds gross income of
shareholders
Controlled Group - Prevents shareholders from using multiple corps to avoid being taxed
at 35% (i.e. parent subsidiary, brother sister, combined)
Earning and Profit (E & P) - Distributions to shareholders are taxable to extent of the corp
current E&P or accumulated E&P; distributions in excess of E&P are nontaxable recovery of
capital
Sec. 301 - Shareholders include dividend in gross income; max 20 % rate
Constructive Dividend - Distributions resulting in deduction to the corp & taxable income
to shareholder; unreasonably high salaries are disallowed and a portion is designated as
dividend and taxed to corp
Stock Dividend - Distribution by corp to shareholders of a corps own stock
Stock Right - Nontaxable unless it changes or had the potential to change; shareholder's
proportionate interest in distributing corporation
Preferred Stock Bailout - Corp issues nontaxable stock dividend, shareholder sells stock at
FMV to third party, corp redeems stock from third party; corp avoids extracting E&P & converts
dividend to long term capital gain
Sec. 306 Stock - Stock received in nontaxable dividend, stock received in nontaxable corp
reorg
Bootstrap Acquisition - Shareholder sells part of their stock to a purchaser and then
causes the corp to redeem the shareholder's remaining shares
Five Year Lookback - Sec. 1231 any net gain is ordinary gain to the extent of any
nonrecaptured net Sec. 1231 losses from previous 5 years
Realized gain (loss) - amount realized from sale is compared with adjusted basis of
property; Realized amount is sum of money received, FMV of other property received and debt
assumed by buyer
Recognized Gain/Loss - FMV - basis +/- cash
ANSWERS
Sec. 351 - Transferor recognizes no gain/loss (deferred until sale or exchange) when they
transfer property to a corporation solely in exchange for stock if they are in control immediately
after transfer
Sec. 351 Property - Cash & almost any other assets (AR, Inventory, Equipment)
Sec. 351 Property Exclusions - Services exchanged for stock, indebtness not evidenced by
security, interest accrued after holding period
Sole Proprietorship Advantages - No entity taxation, usually lower tax rate,
contribute/withdraw w/out consequence, business loss can offest nonbusiness income
Sole Proprietorship Disadvantages - Profits taxed to owner, pays full amount of social
security taxes, no group health, must use same accounting period for personal/business
Partnership Advantages - Partnership pays no tax, no double taxation, partners can use
loses to offset other income, basis increases with share
Partnership Disadvantages - Profits are taxed to partners when earned, partner is not
considered an employee of partnership
C Corporation Advantages - Entity separate and distinct from owners, employed
shareholders are employees for tax purposes, shareholder employees entitles to benefits,
shareholders can exclude 50% of gain on stock held more than 5 years
C Corporation Disadvantages - Double taxation on distributions, shareholders can't
withdraw w/out recognizing income, Net Op loss/capital losses have no tax benefits
S Corporation Advantages - S Corp pays no tax, corp losses flow to shareholders, corp not
taxed on shareholder gains, shareholders can contribute/withdraw, profits taxed at shareholder
level, Shareholder basis increases with # of shares
S Corporation Disadvantages - Shareholders are taxed on all profits, tax burden is heavier
is exceeds C corp rate, can't defer income by choosing different fiscal year
Debt in Corporation Capital Structure Advantages - Corp can deduct interest paid on debt
& Shareholders don't recognize income in debt retirement
Debt in Corporation Capital Structure Disadvantages - Shareholder capital contributions
receive debt instrument in exchange, treated as boot & Shareholder recognizes gain (less of
FMV or realized), if debt becomes worthless loss is bad debt or capital loss
, US Production Activities Deduction - Sec. 199; 9% x lesser of 1) qualified production
activities income for the year or 2) taxable income before production; can't exceed 50% of W2
wages
Dividends Received Deduction - Deduction for dividends received from another
corporation; if corp owns less than 20% of other corp deduct 70%, more than 20% deduct 80%
Net Operating Loss (NOL) - Amount by which deduction exceeds gross income of
shareholders
Controlled Group - Prevents shareholders from using multiple corps to avoid being taxed
at 35% (i.e. parent subsidiary, brother sister, combined)
Earning and Profit (E & P) - Distributions to shareholders are taxable to extent of the corp
current E&P or accumulated E&P; distributions in excess of E&P are nontaxable recovery of
capital
Sec. 301 - Shareholders include dividend in gross income; max 20 % rate
Constructive Dividend - Distributions resulting in deduction to the corp & taxable income
to shareholder; unreasonably high salaries are disallowed and a portion is designated as
dividend and taxed to corp
Stock Dividend - Distribution by corp to shareholders of a corps own stock
Stock Right - Nontaxable unless it changes or had the potential to change; shareholder's
proportionate interest in distributing corporation
Preferred Stock Bailout - Corp issues nontaxable stock dividend, shareholder sells stock at
FMV to third party, corp redeems stock from third party; corp avoids extracting E&P & converts
dividend to long term capital gain
Sec. 306 Stock - Stock received in nontaxable dividend, stock received in nontaxable corp
reorg
Bootstrap Acquisition - Shareholder sells part of their stock to a purchaser and then
causes the corp to redeem the shareholder's remaining shares
Five Year Lookback - Sec. 1231 any net gain is ordinary gain to the extent of any
nonrecaptured net Sec. 1231 losses from previous 5 years
Realized gain (loss) - amount realized from sale is compared with adjusted basis of
property; Realized amount is sum of money received, FMV of other property received and debt
assumed by buyer
Recognized Gain/Loss - FMV - basis +/- cash
