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

Eileen transfers property worth $200,000 basis of $190,000) 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 fair market value of $20,000) executed by Goldfinch and made payable to Eileen.Eileen recognizes gain on the transfer of:

In determining whether § 357c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

On December 31, 2018, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president a cash basis taxpayer), who owns 75% of the corporation's outstanding stock.The $50,000 bonus is paid to the president on February 4, 2019.For Flamingo's 2018 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

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.

A transferor who receives stock for both property and services may not be included in the control group in determining whether an exchange meets the requirements of § 351.

Hunter and Warren form Tan Corporation.Hunter transfers equipment basis of $210,000 and fair market value of $180,000) while Warren transfers land basis of $15,000 and fair market value of $150,000) and $30,000 of cash.Each receives 50% of Tan's stock.As a result of these transfers:

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

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

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:

Quail Corporation is a C corporation with net income of $125,000 during the current year.If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income.Shareholders must report the $25,000 of dividends as income.

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

In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000.Only $7,000 of the boot will be taxed to the shareholder.

Wade and Paul form Swan Corporation with the following investments.Wade transfers machinery basis of $40,000 and fair market value of $100,000), while Paul transfers land basis of $20,000 and fair market value of $90,000) and services rendered worth $10,000) in organizing the corporation.Each is issued 25 shares in Swan Corporation.With respect to the transfers:

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.

The limitation on the deduction of business interest does not apply to noncorporate taxpayers.

The control requirement under § 351 requires that the person or persons transferring property to the corporation, immediately after the transfer, own stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

Dick, a cash basis taxpayer, incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation. With respect to this transaction:

In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville, Tennessee, the city donates land fair market value of $400,000) and cash of $100,000 to the corporation.Several months after the donation, Yellow Corporation spends $450,000 which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land.

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: