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Exam 18: Corporations: Organization and Capital Structure

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Question 31

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Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000) , executed by Green Corporation and made payable to Jane. As a result of the transfer:

A) Jane recognizes no gain.
B) Jane recognizes a gain of $75,000.
C) Jane recognizes a gain of $270,000.
D) Jane recognizes a gain of $320,000.
E) None of the above.

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

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Question 32

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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.

A) Dawn has a gain on the transfer of $15,000.
B) The basis of the assets to the corporation is $300,000.
C) Dawn has a basis of $10,000 in the stock she receives.
D) Dawn has a zero basis in the stock she receives.
E) None of the above.

F) A) and D)
G) B) and D)

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Question 33

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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.

Mitchell and Powell form Green Corporation. Mitchell transfers property (basis of $105,000 and fair market value of $90,000) while Powell transfers land (basis of $8,000 and fair market value of $75,000) and $15,000 of cash. Each receives 50% of Green Corporation's stock (total value of $180,000) . As a result of these transfers:

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351, the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

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

What are the tax consequences if an individual investor incurs a loss on the following: a. Stock that is not § 1244 stock. b. Stock that is § 1244 stock. c. Corporate bond. d. An uncollectible loan made to a corporation.

A shareholder lends money to his corporation in his capacity as an investor. If the loans become worthless, a business bad debt results.

Eve transfers property (basis of $120,000 and fair market value of $400,000) to Green Corporation for 80% of its stock (worth $350,000) and a long-term note (worth $50,000) , executed by Green Corporation and made payable to Eve. As a result of the transfer:

Alan, an Owl Corporation shareholder, makes a contribution to capital of equipment to Owl, basis of $40,000 and fair market value of $50,000. Owl's basis of the equipment that Alan contributes is equal to $50,000, the property's fair market value.

Sofia forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares. Shortly thereafter, she transfers half her shares to her son, Ted. The later transfer to Ted could cause the original transfer to be taxable.

Penny, Miesha, and Sabrina transfer property to Owl Corporation for 75% of its stock. Nancy, their attorney, receives 25% of the stock in Owl for legal services rendered in incorporating the business. What are the tax consequences of these transactions? How should this transaction have been handled?

Mary transfers a building (adjusted basis of $15,000 and fair market value of $90,000) to White Corporation. In return, Mary receives 80% of White Corporation's stock (worth $65,000) and an automobile (fair market value of $5,000) . In addition, there is an outstanding mortgage of $20,000 (taken out 15 years ago) on the building, which White Corporation assumes. With respect to this transaction:

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

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.

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

The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.

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

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?

Nancy, Guy, and Rod form Goldfinch Corporation with the following consideration. Goldfinch issues its 500 shares of stock as follows: 250 to Nancy, 200 to Guy, and 50 to Rod. In addition, Guy gets $50,000 in cash. a. Does Nancy, Guy, or Rod recognize gain (or income)? b. What basis does Guy have in the Goldfinch stock? c. What basis does Goldfinch Corporation have in the inventory? In the land and building? d. What basis does Rod have in the Goldfinch stock?