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Exam 18: Corporations: Organization and Capital Structure

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Question 21

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

A) True
B) False

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Question 22

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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(c) predominates.

A) True
B) False

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Question 23

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Allen transfers marketable securities 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 $40,000.Allen recognizes a capital gain of $40,000 on the transfer.

In order to retain the services of Eve,a key employee in Ted's sole proprietorship,Ted contracts with Eve to make her a 30% owner.Ted incorporates the business receiving in return 100% of the stock.Three days later,Ted transfers 30% of the stock to Eve.Under these circumstances,§ 351 will not apply to the incorporation of Ted's business.

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.

In a § 351 transaction,if a transferor receives consideration other than stock,the transaction can be taxable.

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

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?

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

Kirby and Helen form Red Corporation.Kirby transfers property,basis of $20,000 and value of $300,000,for 100 shares in Red Corporation.Helen transfers property,basis of $40,000 and value of $280,000,and provides legal services in organizing the corporation.The value of her services is $20,000.In return Helen receives 100 shares in Red Corporation.With respect to the transfers:

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation,Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

For § 351 purposes,stock rights and stock warrants are included in the definition of "stock."

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

Karen formed Grebe Corporation with an investment of $100,000 cash,for which she received $10,000 in stock and $90,000 in 7% interest-bearing bonds maturing in ten years.A few years later,Karen loaned Grebe an additional $60,000 on open account.Grebe becomes insolvent in the current year and is adjudged bankrupt.Karen was the president of Grebe Corporation and was paid an annual salary of $50,000 for the past three years.Karen has no other employment.How will Karen treat her losses for tax purposes?

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.

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

Four years ago,Don,a single taxpayer,acquired stock in a corporation that qualified as a small business corporation under § 1244,at a cost of $60,000.Don wants to give his son,Ron,$20,000 to help finance Ron's college education.The stock is currently worth $20,000.Don is considering selling the stock in the current year for $20,000 and giving the cash to Ron.As an alternative,Don could give the stock to Ron and let Ron sell it for $20,000.Which alternative should Don choose?

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.

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.

Joyce,a single taxpayer,transfers property (basis of $120,000 and fair market value of $60,000) to Wren Corporation in exchange for shares of § 1244 stock.As the transfer qualifies under § 351,Joyce takes a $120,000 basis in the Wren stock.In the current year,Joyce sells the Wren Corporation stock for $40,000.What are the consequences of the sale to Joyce?