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Exam 4: Corporations: Organization and Capital Structure

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Question 51

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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.

A) True
B) False

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Question 52

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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?

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In a § 351 transaction,the shareholder's...

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Question 53

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If a shareholder owns stock received as a gift from her mother,it cannot be § 1244 stock.

Ann transferred land worth $500,000,with a tax basis of $150,000,to Brown Corporation,an existing entity,for 200 shares of its stock.Brown Corporation has two other shareholders,Bill and Bob,each of whom holds 100 shares.With respect to the transfer:

Carl transfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000.The land,which has a basis to Carl of $70,000,is worth $160,000.

Even if boot is generated under § 357(b)(i.e. ,the liability is not supported by a bona fide business purpose),the transferor shareholder may not have to recognize gain.

In structuring the capitalization of a corporation,the tax law is neutral for the investor as to debt versus equity financing.

When Pheasant Corporation was formed under § 351,Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock.Kristen's basis in the Pheasant stock is $26,000.Three years later,Pheasant Corporation goes bankrupt and its stock becomes worthless.Kristen,who is single,owned the stock as an investment.Kristen's loss is:

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

A city contributes $500,000 to a corporation as an inducement to locate in the city.Within the next 12 months,the corporation uses the money to purchase property.The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

Ruth transfers property worth $200,000 (basis of $60,000)to Goldfinch Corporation.In return,she receives 80% of its stock (worth $180,000)and a long-term note,executed by Goldfinch and made payable to Ruth (worth $20,000).Ruth will recognize no gain on the transfer.

George (an 80% shareholder) has made loans to Mountainview Corporation that become worthless in the current year.George is not employed by Mountainview.

Ashley,a 70% shareholder of Wren Corporation,transfers property with a basis of $250,000 and a fair market value of $900,000 to Wren Corporation for additional stock.Ashley owns 78% of Wren after the transfer.Two other shareholders in Wren transfer a nominal amount of property to Wren along with Ashley's transfer so that Ashley and the two shareholders own 90% of the Wren stock after the transfer.Does Ashley have taxable gain on the transfer?