Taxation of Business EntitiesCengageNOWv2 Chapter 4Q2

Discussion Question 4-7 (LO. 1) Nancy and her daughter, Kathleen, have been working together in a cattery called "The Perfect Cat". Nancy formed the business several years ago as a sole proprietorship, and it has been very successful. Assets currently have a fair market value of $450,000 and a basis of $180,000. On the advice of their tax accountant, Nancy decides to incorporate "The Perfect Cat." Because of Kathleen's participation, Nancy would like her to receive shares in the corporation. Help Nancy by labelling each of the following items as either a "Relevant" tax issue for this transaction or "Not relevant". a.Will the transfer be subject to the tax-deferred treatment of § 351? ✔ b.Will Kathleen receive stock in exchange for property transferred? ✔ c.If Kathleen is not a transferor of property, how will her receipt of stock be classified for tax purposes? In otherwords, is the receipt of stock a gift from her mother or is it in exchange for services rendered to the business?  ✔ d.If Kathleen is not a transferor of property and she receives stock from the corporation, will the transactionpreclude § 351 treatment for Nancy?  ✔ e.What will be the basis in the stock received by Nancy and Kathleen? ✔ f.What will be the basis of the property in the hands of the corporation? ✔ g.What will be the amount of income recognized by Kathleen and the deduction allowed if the transfer of stockto Kathleen is for services rendered?  ✔ h.What will be the gift tax consequences if the transfer of stock by Nancy to Kathleen is considered a gift? ✔ i.Does Nancy have any other children besides Kathleen? ✔ Feedback Check My Work The three requirements for nonrecognition of gain or loss under § 351 are that (1) property is transferred (2) in exchange for stock and (3) the property transferors are in control of the corporation after the exchange..