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Exam 18: Corporations: Organization and Capital Structure

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Question 31

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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.

A) True
B) False

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Question 32

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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 1,2009.Irene exchanges her property (basis of $140,000 and fair market value of $600,000) for 300 shares in Dove Corporation on April 11,2009.Bob transfers his property (basis of $250,000 and fair market value of $1,000,000) for 500 shares in Dove Corporation on May 15,2011.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?

A) $1,000,000.
B) $750,000.
C) $250,000.
D) $0.
E) None of the above.

F) D) and E)
G) B) and E)

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Question 33

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Linda formed Pink Corporation with an investment of $200,000 cash,for which she received $20,000 in stock and $180,000 in 5% interest-bearing bonds maturing in ten years.A few years later Linda loaned Pink an additional $40,000 on open account.Pink becomes insolvent in the current year and is adjudged bankrupt.Linda was the president of Pink Corporation and was paid an annual salary of $35,000 for the past three years.Linda has no other employment.How will Linda treat her losses for tax purposes?

Kim,a real estate dealer,and others form Eagle Corporation under § 351.Kim contributes inventory (land held for resale)in return for Eagle stock.The holding period for the stock includes the holding period of the inventory.

Leonard transfers equipment (basis of $40,000 and fair market value of $100,000) for additional stock in Green Corporation.After the transfer,Leonard owns 90% of the stock.Leonard had claimed depreciation of $50,000 on the equipment prior to transferring it to Green Corporation.With respect to the transfer:

Carl and Ben form Eagle Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Eagle.Ben transfers a secret process with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Eagle.Carl will have a tax basis of $50,000 in his stock in Eagle Corporation,but Ben's basis in his stock will be zero.

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

Isabella and Marta form Pine Corporation.Isabella transfers land (basis of $40,000 and fair market value of $180,000)for 50 shares plus $20,000 cash,while Marta transfers $160,000 cash for the other 50 shares in Pine Corporation.Pine Corporation has a basis of $40,000 in the land it receives from Isabella.

The bona fide business requirement of § 357(b)is easily satisfied as long as the liability arose in the normal course of conducting the business that is incorporated.

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 a § 351 transfer,the receipt of boot is not taxed if the shareholder has a realized loss.

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.

Trudy forms Oak Corporation by transferring land with a basis of $150,000 (fair market value of $800,000),subject to a mortgage of $450,000.Two weeks prior to incorporating Oak,Trudy borrows $10,000 for personal purposes and gives the lender a second mortgage on the land.Oak Corporation issues stock worth $340,000 to Trudy and assumes the two mortgages on the land.What are the tax consequences to Trudy and to Oak Corporation?

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.

Rosa,the sole shareholder of Robin Corporation,contributes land (basis of $40,000 and fair market value of $100,000)to the corporation but does not receive additional stock.Neither Rosa nor Robin Corporation will have to recognize gain as a result of this transfer.

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.

In order to retain the services of Bonnie,a key employee in Ralph's sole proprietorship,Ralph contracts with Bonnie to make her a 25% owner.Ralph incorporates the business receiving in return 100% of the stock.Three days later,Ralph transfers 25% of the stock to Bonnie.Under these circumstances,§ 351 will not apply to the incorporation of Ralph's business.

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:

Kim owns 100% of the stock of Cardinal Corporation.In the current year Kim transfers an installment obligation,tax basis of $30,000 and fair market value of $200,000,for additional stock in Cardinal worth $200,000.

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.