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Exam 4: Corporations: Organization and Capital Structure

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Question 31

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Erica transfers land worth $500,000,basis of $100,000,to a newly formed corporation,Robin Corporation,for all of Robin's stock,worth $300,000,and a 10-year note.The note was executed by Robin and made payable to Erica in the amount of $200,000.As a result of the transfer:

A) Erica does not recognize gain.
B) Erica recognizes gain of $400,000.
C) Robin Corporation has a basis of $100,000 in the land.
D) Robin Corporation has a basis of $300,000 in the land.
E) None of the above.

F) A) and E)
G) A) and D)

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Question 32

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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:

A) Eve recognizes no gain.
B) Eve recognizes a gain of $230,000.
C) Eve recognizes a gain of $280,000.
D) Eve recognizes a gain of $50,000.
E) None of the above.

F) D) and E)
G) A) and D)

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Question 33

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A shareholder transfers a capital asset to Red Corporation for its stock.If the transfer qualifies under § 351,Red's holding period for the asset begins on the day of the exchange.

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.

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:

In general,the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer.

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 and Art's basis in the Condor stock is $130,000.Five years later,Art sells the Condor stock for $50,000.With respect to the sale,Art has:

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.

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.

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:

Beth 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.

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.

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,executed by Goldfinch and made payable to Eileen (fair market value of $20,000).Eileen recognizes no gain on the transfer.

One month after Sally incorporates her sole proprietorship,she gives 25% of the stock to her children.Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement.

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?

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

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

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: