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Exam 4: Corporations: Organization and Capital Structure

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Question 51

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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.

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Significant tax differences exist betwee...

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Question 52

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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.

A) These transfers are fully taxable and not subject to § 351.
B) Ron's basis in his stock is $27,000.
C) Ron's basis in his stock is $6,000.
D) Brad's basis in his stock is $20,000.
E) None of the above.

F) C) and D)
G) A) and B)

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Question 53

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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.

Rachel owns 100% of the stock of Cardinal Corporation. In the current year Rachel transfers an installment obligation, tax basis of $180,000 and fair market value of $350,000, for additional stock in Cardinal worth $350,000.

Beth 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.

Penny, Miesha, and Sabrina transfer property to Owl Corporation for 75% of its stock. Nancy, their attorney, receives 25% of the stock in Owl for legal services rendered in incorporating the business. What are the tax consequences of these transactions? How should this transaction have been handled?

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

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.

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?

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 not apply to the incorporation of Ted's business.

For transfers falling under § 351, what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?

To help avoid the thin capitalization problem, it is advisable to make the repayment of the debt contingent upon the corporation's earnings.