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Exam 4: Corporations: Organization and Capital Structure

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Question 41

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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.

A) Albert has a recognized gain on the transfer of $140,000.
B) Albert has a recognized gain on the transfer of $80,000.
C) Albert has a recognized gain on the transfer of $60,000.
D) Gold Corporation has a basis in the land of $220,000.
E) None of the above.

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

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Question 42

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In return for legal services rendered incident to its formation,Crimson Corporation issues stock to Greta,an attorney.Crimson cannot immediately deduct the value of this stock but must treat it as a capital expenditure.

A) True
B) False

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Question 43

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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.

Adam transfers inventory with an adjusted basis of $120,000,fair market value of $300,000,for 85% of the stock of Heron Corporation.In addition,he receives cash of $30,000.Adam recognizes a capital gain of $30,000 on the transfer.

What are the tax consequences if an individual investor incurs a loss on the following:

Ann,Irene,and Bob incorporate their respective businesses and form Dove Corporation.Ann exchanges her property (basis of $100,000 and fair market value of $400,000) for 200 shares in Dove Corporation on March 3,2008.Irene exchanges her property (basis of $140,000 and fair market value of $600,000) for 300 shares in Dove Corporation on April 10,2008.Bob transfers his property (basis of $250,000 and fair market value of $1,000,000) for 500 shares in Dove Corporation on May 17,2010.Bob's transfer is not part of a prearranged plan with Ann and Irene to incorporate their businesses.What gain,if any,will Bob recognize on the transfer?

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

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.

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $55,000;land by Tony (basis of $35,000 and fair market value of $45,000) .Dove Corporation issues 200 shares of stock,100 each to Sarah and Tony.Thus,each receives stock in Dove worth $50,000.

Issues relating to basis arise when a taxpayer is involved in a § 351 transaction.Describe the underlying rules,and the purpose they serve.

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000.Even though § 351 applies,Tina may recognize her realized loss of $10,000.

Juan exchanges property,basis of $200,000 and fair market value of $2.5 million,for 65% of the stock of Green Corporation.The other 35% is owned by Gloria who acquired it several years ago.What are the tax consequences to the parties involved?

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation.After the transfer,Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

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

Three individuals form Skylark Corporation with the following contributions: Cliff,cash of $50,000 for 50 shares;Brad,land (fair market value of $20,000)for 20 shares;and Ron,cattle (fair market value of $9,000)for 9 shares and services (fair market value of $21,000)for 21 shares.Section 351 will not apply in this situation because the control requirement has not been satisfied.

In a § 351 transfer,gain will be recognized to the extent of the greater of realized gain or the boot received.

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?

What is the rationale underlying the tax deferral treatment available under § 351? Realized gain or loss is not recognized in a § 351 transaction when a taxpayer's economic status has not changed.This provision reflects the principle that gain should not be recognized when a taxpayer's investment has not substantively changed.When a business is incorporated,the owner's economic status remains the same;only the form of the investment has changed.

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

George transfers cash of $150,000 to Grouse Corporation,a newly formed corporation,for 100% of the stock in Grouse 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,Grouse has net taxable income of $40,000.If Grouse pays George interest of $6,300 and $7,000 principal payment on the note: