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Exam 4: Corporations: Organization and Capital Structure

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Question 31

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Rhonda and Marta form Blue Corporation. Rhonda transfers land basis of $55,000 and fair market value of $180,000) for 50 shares plus $20,000 cash. Marta transfers $160,000 cash for 50 shares in Blue Corporation.

A) Rhonda's basis in the Blue Corporation stock is $55,000.
B) Blue Corporation's basis in the land is $55,000.
C) Blue Corporation's basis in the land is $180,000.
D) Rhonda recognizes a gain on the transfer of $125,000.
E) None of these.

F) C) and E)
G) B) and C)

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Question 32

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In order to retain the services of Eve, a key employee in Ted's sole proprietorship, Ted contracts with Eve to make her a 30% owner. Ted incorporates the business, receiving in return 100% of the stock. Three days later, Ted transfers 30% of the stock to Eve. Under these circumstances, § 351 will apply to the incorporation of Ted's business.

A) True
B) False

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Question 33

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Donghai transferred the following assets to Starling Corporation. $\begin{array}{lll}&&\text { Fair Market }\\& \text { Adjusted Basis } & \text { Value }\\\text { Cash } & \$ 120,000 & \$ 120,000 \\\text { Machinery } & 48,000 & 36,000 \\\text { Land } & 108,000 & 144,000\end{array}$ In exchange, Donghai received 50% of Starling Corporation's only class of stock outstanding. The stock has no established value. However, all parties believe that the value of the stock Donghai received is the equivalent of the value of the assets she transferred. The only other shareholder, Rick, formed Starling Corporation five years ago.

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?

Art, an unmarried individual, transfers property basis of $130,000 and fair market value of $120,000) to Condor Corporation in exchange for §1244 stock. The transfer qualifies as a nontaxable exchange under § 351. Because the property is loss property, Condor takes a basis of $120,000 in the property. Five years later, Art sells the Condor stock for $50,000. With respect to the sale, Art has:

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:

Sean, a sole proprietor, is engaged in a service business and uses the cash basis of accounting. In the current year, Sean incorporates his business by forming Aqua Corporation. In exchange for all of its stock, Aqua receives: assets basis of $400,000 and fair market value of $2 million), trade accounts payable of $110,000, and loan of $390,000 due to a bank. The proceeds from the bank loan were used by Sean to provide operating funds for the business. Aqua Corporation assumes all of the liabilities transferred to it. a. Does Sean recognize any gain on the incorporation? Explain. b. What basis does Sean have in the Aqua stock? c. What basis does Aqua Corporation have in the assets it receives?

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.

Lynn transfers property basis of $225,000 and fair market value of $300,000) to Condor Corporation in exchange for § 1244 stock. The transfer qualifies as a nontaxable exchange under § 351. In the current year, Lynn sells the Condor stock for $100,000. Assume Lynn files a joint return with her husband, Ricky. With respect to the sale, Lynn has:

A shareholder's holding period for stock received under § 351 can include the holding period of the property transferred to the corporation.

Under Federal tax law, a bias for corporate issuers exists in favor of debt as compared to equity when financing the operations of a corporation.

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

Four years ago, Don, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244, at a cost of $60,000. Don wants to give his son, Ron, $20,000 to help finance Ron's college education. The stock is currently worth $20,000. Don is considering selling the stock in the current year for $20,000 and giving the cash to Ron. As an alternative, Don could give the stock to Ron and let Ron sell it for $20,000. Which alternative should Don choose?

Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of $50,000, while Maria transfers a proprietary formula basis of $0; fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.

A shareholder lends money to his corporation in his capacity as an investor. If the loans become worthless, a business bad debt results.

In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder.

Sofia forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares. Shortly thereafter, she transfers half her shares to her son, Ted. The later transfer to Ted could cause the original transfer to be taxable.

In return for legal services worth $60,000 rendered incident to its formation, Crimson Corporation issues stock to Greta, an attorney. Crimson cannot immediately deduct the value of any of this stock but instead must capitalize it as an organizational expenditure.

In determining whether § 357c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

Karen formed Grebe Corporation with an investment of $100,000 cash for which she received $10,000 in stock and $90,000 in 7% interest-bearing bonds maturing in 10 years. A few years later, Karen loaned Grebe an additional $60,000 on open account. Grebe becomes insolvent in the current year and is adjudged bankrupt. Karen was the president of Grebe Corporation and was paid an annual salary of $50,000 for the past three years. Karen has no other employment. How will Karen treat her losses for tax purposes?