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Exam 18: Corporations: Organization and Capital Structure

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Question 1

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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.

A) Carl will have a recognized gain on the transfer of $90,000.
B) Carl will have a recognized gain on the transfer of $30,000.
C) Cardinal Corporation will have a basis in the land transferred by Carl of $70,000.
D) Cardinal Corporation will have a basis in the land transferred by Carl of $160,000.
E) None of the above.

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

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Question 2

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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) B) and D)
G) B) and C)

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Question 3

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Rick transferred the following assets and liabilities to Warbler Corporation. ​ 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) .

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.

The control requirement under § 351 requires that the person or persons transferring property to the corporation,immediately after the transfer,own stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

Dawn,a sole proprietor,was engaged in a service business and reported her income on a cash basis.Later,she incorporates her business and transfers the assets of the business to the corporation in return for all the stock in the corporation plus the corporation's assumption of the liabilities of her proprietorship.All the receivables and the unpaid trade payables are transferred to the newly formed corporation.The assets of the proprietorship had a basis of $105,000 and fair market value of $300,000.The trade accounts payable totaled $25,000.There was a note payable to the bank in the amount of $95,000 that the corporation assumes.The note was issued for the purchase of computers and other business equipment.

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?

Joe and Kay form Gull Corporation.Joe transfers cash of $250,000 for 200 shares in Gull Corporation.Kay transfers property with a basis of $50,000 and fair market value of $240,000.She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation.The value of Kay's services is $10,000.With respect to 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.

In order 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.

Similar to like-kind exchanges,the receipt of "boot" under § 351 can cause loss to be recognized.

A shareholder contributes land to his wholly owned corporation but receives no stock in return.The corporation has a zero basis in the land.

Rita forms Finch Corporation by transferring land (basis of $125,000; fair market value of $750,000) which is subject to a mortgage of $375,000.Two weeks prior to incorporating Finch,Rita borrows $125,000 for personal purposes and gives the lender a second mortgage on the land.Finch Corporation issues stock worth $250,000 to Rita and assumes the two mortgages on the land.What are the tax consequences to Rita and to Finch Corporation?

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

The use of § 351 is not limited to the initial formation of a corporation,and it can apply to later transfers as well.

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.

Trish and Ron form Pine Corporation.Trish transfers inventory (basis of $60,000 and fair market value of $110,000) for 50% of the stock in Pine.Ron transfers machinery (basis of $20,000 and fair market value of $60,000) and agrees to serve as manager of Pine Corporation for one year for 50% of the stock.What are the tax consequences to Trish,Ron,and Pine Corporation?

Rob and Fran form Bluebird Corporation with the following investments. ​ Each receives 50% of Bluebird's stock.In addition,Fran receives cash of $40,000.One result of these transfers is that Fran has a:

In order to encourage the development of an industrial park,a county donates land to Ecru Corporation.The donation does not result in gross income to Ecru.

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