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Exam 4: Corporations: Organization and Capital Structure

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Question 1

True/False

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To ease a liquidity problem, all of the shareholders of Osprey Corporation contribute additional cash to its capital. Osprey has no tax consequences from the contribution.

A) True
B) False

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Question 2

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George transfers cash of $150,000 to Finch Corporation, a newly formed corporation, for 100% of the stock in Finch worth $80,000 and debt in the amount of $70,000, payable in equal annual installments of $7,000 plus interest at the rate of 9% per annum. In the first year of operation, Finch has net taxable income of $40,000. If Finch pays George interest of $6,300 and $7,000 principal payment on the note:

A) George has dividend income of $13,300.
B) Finch Corporation does not have a tax deduction with respect to the payment.
C) George has dividend income of $7,000.
D) Finch Corporation has an interest expense deduction of $6,300.
E) None of these.

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

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Question 3

Multiple Choice

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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.

To induce Yellow Corporation to build a new manufacturing facility in Knoxville, Tennessee, the city donates land fair market value of $400,000) and cash of $100,000 to the corporation. Several months after the donation, Yellow Corporation spends $450,000 which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land.

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?

Rick transferred the following assets and liabilities to Warbler Corporation. $\begin{array}{lll}&&\text { Fair Market }\\& \text { Adjusted Basis } & \text { Value }\\\text { Building } & \$ 210,000 & \$ 225,000 \\\text { Equipment } & 45,000 & 75,000 \\\text { Trucks } & 15,000 & 30,000 \\\text { Mortgage (held for four years) on building } & 30,000 & 30,000\end{array}$ In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding fair market value of $225,000) .

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

Amy owns 20% of the stock of Wren Corporation, which she acquired several years ago at a cost of $10,000. Amy is vice president of Wren and earns a salary of $80,000 annually. Last year, Wren Corporation was experiencing financial problems, and Amy loaned the corporation $25,000. In the current year, Wren becomes bankrupt, and both her stock investment and the loan become worthless. Amy has a nonbusiness bad debt deduction this year of $25,000.

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city. Ann, the sole shareholder, contributes equipment basis of $70,000 and fair market value of $200,000) to help Orange in its new operations. What are the tax consequences of these transfers to Orange Corporation?

If a transaction qualifies under § 351, any recognized gain is equal to the value of the boot received.

What is the rationale underlying the tax deferral treatment available under § 351?

Basis of appreciated property transferred minus boot received including liabilities transferred) plus gain recognized equals basis of stock received in a § 351 transfer.

Tan Corporation desires to set up a manufacturing facility in the western part of the United States. After considerable negotiations with Butte, Montana, Tan accepts the following offer: land fair market value of $4.5 million) and cash of $1.5 million. a. How much income, if any, must Tan recognize? b. What basis will Tan Corporation have in the land? c. Within one year of the contribution, Tan purchases equipment for $1.6 million. What basis will Tan have in the equipment?

Gabriella and Juanita form Luster Corporation. Gabriella transfers cash of $50,000 for 50 shares of stock, and Juanita transfers information concerning a proprietary process basis of zero and fair market value of $50,000) for 50 shares of stock.

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?

Jane and Walt form Yellow Corporation. Jane transfers equipment worth $950,000 basis of $200,000) and cash of $50,000 to Yellow Corporation for 50% of its stock. Walt transfers a building and land worth $1,050,000 basis of $400,000) for 50% of Yellow's stock and $50,000 in cash.

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.

To encourage the development of an industrial park, a county donates land to Ecru Corporation. The donation results in gross income to Ecru.

Because services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

Albert transfers land basis of $140,000 and fair market value of $320,000) to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000. Gold assumes Albert's mortgage on the land of $200,000.