Exam 12: Organization, Capital Structure, and Operating Rules

When consideration is transferred to a corporation in return for stock, the definition of "property" is important because tax deferral treatment of § 351 is available only to taxpayers who transfer property.

Red Corporation, which owns stock in Blue Corporation, had net operating income of $200,000 for the year.Blue pays Red a dividend of $40,000.Red takes a dividends received deduction of $28,000.Which of the following statements is correct?

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation.The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later, Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark City.Ann, the sole shareholder, contributes equipment (basis of $70,000 and fair market value of $200,000) to help Orange in its new operations.What are the tax consequences of these transfers to Orange Corporation?

Albert transfers land (basis of $140,000 and fair market value of $320,000) to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000.Gold assumes Albert's mortgage on the land of $200,000.

What is the rationale underlying the tax deferral treatment available under § 351?

Under the "check-the-box" Regulations, a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Stock in Merlin Corporation is held equally by Jane, Eve, and Fred.Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000.Jane, Eve, and Fred propose to loan Merlin $2,000,000 each, taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate.Merlin Corporation has current taxable income of $7,000,000.How are the payments on the notes treated for tax purposes?

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.

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.

In each of the following independent situations, determine the corporation's income tax liability.Assume that all corporations use a calendar year 2017. ​ Taxable Income Viol et Corporation 63,000 Indigo Corporation 180,000 Orange Corporation 510,000 Blue Corporation 11,100,000 Green Corporation (personal service 225,000 corporation) ​

Dick, a cash basis taxpayer, incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation. Fair Market Adjusted Basis Value Cash \ 10,000 \ 10,000 Buil ding 120,000 175,000 Mortgage payable (secured by the building and held 135,000 135,000 for 15 years) ? With respect to this transaction:

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.

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is an addition on Schedule M-1?

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

Rachel is the sole member of an LLC, and Jordan is the sole shareholder of a C corporation.Both businesses were started in the current year, and each business has a long-term capital gain of $10,000 for the year.Neither business made any distributions during the year.With respect to this information, which of the following statements is correct?

Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

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

Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2017.Hornbill incurred the following expenses during its first year of operations (May 1 - December 31, 2017): temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and bylaws of $7,500.Hornbill Corporation's 2017 deduction for organizational expenditures is $5,800.