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Exam 18: Corporations: Organization and Capital Structure

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Question 41

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Kevin and Nicole form Indigo Corporation with the following transfers: inventory from Kevin (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000) .Nicole,an accountant,agrees to contribute her services (worth $25,000) in organizing Indigo.The corporation's stock is distributed equally to Kevin and Nicole.As a result of these transfers:

A) Indigo can deduct $25,000 as a business expense.
B) Nicole has a recognized gain of $55,000 on the transfer of the real estate.
C) Indigo has a basis of $360,000 in the inventory.
D) Indigo has a basis of $375,000 in the real estate.
E) None of the above.

F) None of the above
G) All of the above

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Question 42

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

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To the extent that § 351 causes a realiz...

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Question 43

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

Gabriella and Juanita form Luster Corporation,each receiving 50 shares of its stock.Gabriella transfers cash of $50,000,while Juanita transfers a secret process (basis of zero and a fair market value of $50,000).Neither Gabriella nor Juanita recognizes gain as a result of these transfers.

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.

Blue Corporation made loans to a customer,Cedar Corporation.In the current year,these loans become worthless.

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?

If both §§ 357(b)and (c)apply to the same transfer (i.e. ,the liability is not supported by a bona fide business purpose and also exceeds the basis of the properties transferred),§ 357(b)predominates.

Art,an unmarried individual,transfers property (basis of $130,000 and fair market value of $120,000) to Condor Corporation in exchange for § 1244 stock.The transfer qualifies as a nontaxable exchange under § 351.Five years later,Art sells the Condor stock for $50,000.With respect to the sale,Art has:

Shawn,a sole proprietor,is engaged in a service business and uses the cash basis of accounting.In the current year,Shawn incorporates his business by forming Aqua Corporation.In exchange for all of its stock,Aqua receives: assets (basis of $380,000 and fair market value of $1.8 million),trade accounts payable of $125,000,and loan due to a bank of $375,000.The proceeds from the bank loan were used by Shawn to provide operating funds for the business.Aqua Corporation assumes all of the liabilities transferred to it.

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.

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later,Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark 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?

When depreciable property is transferred to a controlled corporation under § 351,any recapture potential disappears and does not carry over to the corporation.

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 cash.

The receipt of securities (i.e. ,long-term debt)in exchange for the transfer of appreciated property to a controlled corporation results in recognition of realized gain to the transferor.

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.

Stock in Merlin Corporation is held equally by Jane,Eve,and Fred.Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000.Jane,Eve,and Fred propose to loan Merlin $2,000,000 each,taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate.Merlin Corporation has current taxable income of $7,000,000.How are the payments on the notes treated for tax purposes?

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?

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

Eileen transfers property worth $200,000 (basis of $60,000) to Goldfinch Corporation.In return,she receives 80% of the stock in Goldfinch Corporation (fair market value of $180,000) and a long-term note (fair market value of $20,000) executed by Goldfinch and made payable to Eileen.Eileen recognizes gain on the transfer of: