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Exam 9: Corporations: Organization, capital Structure, and Operating Rules

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Question 71

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Perry organized Cardinal Corporation 10 years ago by contributing property worth $2 million (basis of $450,000)for 2,500 shares of stock in Cardinal,representing 100% of the stock in the corporation.Perry later gave each of his children,Brittany and Julie,750 shares of stock in Cardinal Corporation.In the current year,Perry transfers property worth $600,000 (basis of $150,000)to Cardinal for 1,000 shares in the corporation.What gain,if any,will Perry recognize on the transfer?

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Perry recognizes a gain of $450,000 on t...

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Question 72

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Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation.After the transfer,Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

A) Leah recognizes ordinary income of $70,000.
B) The § 1245 depreciation recapture potential carries over to Crow Corporation.
C) The § 1245 depreciation recapture potential disappears.
D) Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000.
E) None of the above.

F) B) and D)
G) B) and E)

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Question 73

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Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income.However,an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Briefly discuss the requirements for the dividends received deduction.

Nick exchanges property (basis of $100,000; fair market value of $3 million),for 65% of the stock of Yellow Corporation.The other 35% of the stock is owned by Gloria who acquired it several years ago.What are the tax consequences to Nick?

Rajib is the sole shareholder of Robin Corporation,a calendar year S corporation.Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses)and distributed $80,000 to Rajib.Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.

During the current year,Coyote Corporation (a calendar year C corporation)has the following transactions:

Eagle Company,a partnership,had a short-term capital loss of $10,000 during the year.Aaron,who owns 25% of Eagle,will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Because of the taxable income limitation,no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation.

When incorporating her sole proprietorship,Samantha transfers all of its assets and liabilities.Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure.Under these circumstances,the entire $30,000 will be treated as boot.

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation.The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

Donald owns a 45% interest in a partnership that earned $130,000 in the current year.He also owns 45% of the stock in a C corporation that earned $130,000 during the year.Donald received $20,000 in distributions from each of the two entities during the year.With respect to this information,Donald must report $78,500 of income on his individual income tax return for the year.

Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000) ,executed by Green Corporation and made payable to Jane.As a result of the transfer:

An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.

When forming a corporation,a transferor-shareholder may choose to receive some corporate debt along with stock.Identify some of the issues the transferor must consider when deciding whether debt should be a part of the transaction.

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?

Wade and Paul form Swan Corporation with the following investments.Wade transfers machinery (basis of $40,000 and fair market value of $100,000) ,while Paul transfers land (basis of $20,000 and fair market value of $90,000) and services rendered (worth $10,000) in organizing the corporation.Each is issued 25 shares in Swan Corporation.With respect to the transfers:

Dawn is the sole shareholder of Thrush Corporation,a C corporation.In the current year,Thrush earned $350,000 and distributed $75,000 to Dawn.Kirk is the sole shareholder of Swallow Corporation,an S corporation.In the current year,Swallow earned $350,000 and distributed $75,000 to Kirk.Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk.