 Hello, and welcome to this session in which we would look at a CPA exam simulation or simply put a college exercise that deals with section 351 Isabella Mike and Benjamin consolidated their individual businesses and established Phoenix Incorporated So simply put each one of them might have their own business with some assets what they did they combined our business They combined our assets and they established a new corporation on February 2 Isabella trades her asset basis of 60 worth of 200,000 for 200 years of the new corporation Phoenix on March 20th Mike swaps his assets 80,000 of basis with a value of 600,000 for 600 years of the new corporation Phoenix on April 5th, Benjamin also joined an exchange $150,000 basis of assets that has a value of 200,000 and they gave Benjamin 200 years So we're gonna do we're gonna answer a series of questions on the CPA exam What they might do they might give you a drop-down menu or basically a box and you have to put the answer or a drop-down menu Where you would say yes No, you know section 351 or not section 351 so on and so forth in this session I'm gonna answer all the questions and details so this way you can answer any CPA exam simulation Let's go ahead and get started before we proceed any further I have a public announcement about my company farhat lectures dot-com Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of Lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today If this is a pre-arranged transaction, what's the amount of gain realized recognized for example on the exam? You might have two column one is for the realized realized Asset realized not asset realized gain and one for the recognize and you have to put you know How much for Mike? How much for Isabella? How much for? Benjamin but it doesn't matter the answers are the answers so let's first compute the realized gain Well, the realized gain is how much well the realized gain is if you sold this asset How much will you have realized Isabella? She has an asset of 200,000 basis of 60. She would have realized 140,000 Mike would have realized 600 minus 80 equal to 520 Benjamin would have realized 50,000 which is 200,000 minus 150. That's the realized gain The question also ask it's not only the realized how much of it is recognized in other words. How much of that gain is taxable Now and the answer is if this was a pre-arranged transaction. It means this is section 351 how much of that gain is recognized in the answer is none None of the game is recognized since this is section 351 Transaction therefore we insert three questions here the amount realized recognized and whether this is a section 351 or not Now, how would you input the answers depending on how the simulation is presented to you? assume Isabella and Mike made the transfer three years ago and Benjamin was not a Benjamin transfer was not pre-arranged so simply put what we are saying is this Three years ago Mike and Isabella contributed to the company and they control everything and three years later Benjamin said I would like to join you and Benjamin contributed those 200 shares, which is 20% Would this be a section 351 well Kind of you're told Indirectly, this is not the contribution of Benjamin is not section 351 because it's not pre-arranged with them It's not only because that's not pre-arranged because after the transfer Benjamin did not control 80% of the corporation. Well, if that's not the case, it's not section 351 Benjamin would recognize $50,000 of the gain of this 50,000 it will be taxable Gain of $50,000. Okay. Let's change the scenario a little bit Let's assume and going back to the original scenario. Let's forget about scenario two Benjamin property had a basis of when they contributed all together a basis of 250 with a fair market value of 200,000 What would you advise Benjamin to do under those circumstances? Well, what's what's different here? What's different here is? Benjamin asset has a loss of 50,000 now You might be saying oh, if that's the case, we're gonna have to use the built-in loss We have to go into the built-in Loss and the answer is no the built-in loss is only is triggered when in aggregate an Aggregate there's a loss an aggregate. There's no loss Even if we give Benjamin a loss of 50,000 we still have two large gains that will wipe out the loss So on aggregate, there's no loss. Therefore. There's no built-in loss So here what we're talking about is Benjamin himself is contributing an asset with a loss What would you Benjamin? What would you advise Benjamin to do? I would tell Benjamin this is basically and this is basically the new CPA exam where you have to kind of give some Tax planning tax advice. I would say don't don't don't be part of this deal If you want to contribute this asset don't be in a prearranged because if you're in a prearranged transaction Section 351 would apply and you cannot use your loss. What would I advise Benjamin to do? I would advise Benjamin to Contribute this property separately in a separate transaction or I would say sell the asset if we don't if you don't need the asset specifically sell the asset Recognize the gain then take your cash because you know, you're gonna get two hundred thousand dollar cash for this asset Take the cash and contribute the cash this way you could recognize the game So don't be part of the section 351 Isabella and Mike will benefit because they're gonna defer the gains You are not going to benefit so sell it contribute the cash Get the tax benefit get twenty percent of the company by contributing the cash not the asset So you can take advantage of the tax deduction So this is basically a CPA exam simulation that you might see about section 351 on the exam And this is gonna help you understand section 351 much much better Go to Farhat lectures look at additional MCQs through false additional exercises that's gonna help you understand this important topic Section 351. Good luck. Study hard whether you're a CPA exam candidate and enrolled agent or an accounting student and stay safe