Matt and Sheila Form Krupp Corporation

question 78

Multiple Choice

Matt and Sheila form Krupp Corporation. Matt contributes property with an FMV of $55,000 and a basis of $35,000. Sheila contributes property with an FMV of $75,000 and a basis of $40,000. Matt sells his stock to Paul shortly after the exchange. The transaction will

• A) qualify with respect to Sheila under Sec. 351 whether Matt qualifies or not.
• B) qualify under Sec. 351 only if an advance ruling has been obtained.
• C) not qualify under Sec. 351.
• D) qualify under Sec. 351 if Matt can show that the sale to Paul was not part of a prearranged plan.

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Definitions:

Mutually Exclusive

Projects that cannot be performed at the same time. A company could choose either Project 1 or Project 2, or it can reject both, but it cannot accept both projects.

IRR

Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. It is used to evaluate the attractiveness of an investment or project.

Hard Capital Rationing

Hard capital rationing involves a situation where a company cannot access additional funds for investments at any cost due to external factors, such as market conditions or regulatory limits.

Discounted Payback

A capital budgeting method that calculates the time it takes to recoup an investment's initial costs, taking the time value of money into account.