Exam 12: Corporations: Organization, Capital Structure, and Operating Rules

Canary Corporation, which sustained a $5,000 net short-term capital loss during the year, will enter $5,000 as an addition on Schedule M-1 of Form 1120.

Sarah and Tony mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000; land by Tony basis of $25,000 and fair market value of $35,000).Dove Corporation issues 400 shares of stock, 200 each to Sarah and Tony.Thus, each receives stock in Dove worth $50,000.

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

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.

A corporation must file a Federal income tax return even if it has no taxable income for the year.

In the current year, Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation.Azul owns 25% of the Naranja Corporation stock.Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $19,500.

Similar to the like-kind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.

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

If both §§ 357b) 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), § 357c) predominates.

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.

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.

Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year.The Tax Court has held that $90,000 represents unreasonable compensation.Katherine has avoided double taxation only to the extent of $210,000 the portion of the salary that is considered reasonable compensation).

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 apply to the incorporation of Ted's business.

Basis of appreciated property transferred minus boot received including liabilities transferred) plus gain recognized equals basis of stock received in a § 351 transfer.

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

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.

In return for legal services worth $60,000 rendered incident to its formation, Crimson Corporation issues stock to Greta, an attorney.Crimson cannot immediately deduct the value of any of this stock but instead must capitalize it as an organizational expenditure.

Carl and Ben form Eagle Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Eagle.Ben transfers proprietary information 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 and Ben's basis in his stock will be zero.

Because boot is generated under § 357b) i.e., the liability is not supported by a bona fide business purpose), the transferor shareholder will always have to recognize gain.

Ann transferred land worth $200,000, with a tax basis of $40,000, to Brown Corporation, an existing entity, for 100 shares of its stock.Brown Corporation has two other shareholders, Bill and Bob, each of whom holds 100 shares.With respect to the transfer: