Rick transferred the following assets and liabilities to Warbler Corporation. $\begin{array}{lll}&&\text { Fair Market }\\ & \text { Adjusted Basis } & \text { Value }\\ \text { Building } & \$ 210,000 & \$ 225,000 \\ \text { Equipment } & 45,000 & 75,000 \\ \text { Trucks } & 15,000 & 30,000 \\ \text { Mortgage (held for four years) on building } & 30,000 & 30,000 \end{array}$ In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding fair market value of $225,000).

A) Rick has a recognized gain of $60,000. B) Rick has a recognized gain of $75,000. C) Rick's basis in the stock of Warbler Corporation is $270,000. D) Warbler Corporation has the same basis in the assets received as Rick does in the stock. E) None of these. A) Rick has a recognized gain of $60,000. B) Rick has a recognized gain of $75,000. C) Rick's basis in the stock of Warbler Corporation is $270,000. D) Warbler Corporation has the same basis in the assets received as Rick does in the stock. E) None of these.

Exam 4: Corporations: Organization and Capital Structure

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?

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Question 1

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Generally, when another party assumes a liability in a property transaction, the party no longer responsible for the debt is treated as having received cash or boot. This is consistent with the rule dealing with like-kind exchanges under § 1031. However, when the acquiring corporation assumes a liability in a § 351 transaction, § 357a) provides that the transfer does not result in boot to the transferor-shareholder for gain recognition purposes. To do so could trigger gain to the property transferor if the corporation assumed a mortgage on the transfer of encumbered property, which could, in turn, discourage the use of the corporate form of business.
The general rule of § 357a) has two exceptions: 1) § 357b) provides that if the principal purpose of the assumption of the liabilities is to avoid tax or if there is no bona fide business purpose behind the exchange, the liabilities are treated as boot, and 2) § 357c) provides that if the sum of the liabilities exceeds the adjusted basis of the properties transferred, the excess is taxable gain.

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

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Question 2

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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.

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Question 3

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To encourage the development of an industrial park, a county donates land to Ecru Corporation. The donation results in gross income to Ecru.

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Question 4

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

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Question 5

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

(True/False)

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Question 6

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.

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Question 7

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.

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Question 8

Amy owns 20% of the stock of Wren Corporation, which she acquired several years ago at a cost of $10,000. Amy is vice president of Wren and earns a salary of $80,000 annually. Last year, Wren Corporation was experiencing financial problems, and Amy loaned the corporation $25,000. In the current year, Wren becomes bankrupt, and both her stock investment and the loan become worthless. Amy has a nonbusiness bad debt deduction this year of $25,000.

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Question 9

Tan Corporation desires to set up a manufacturing facility in the western part of the United States. After considerable negotiations with Butte, Montana, Tan accepts the following offer: land fair market value of $4.5 million) and cash of $1.5 million. a. How much income, if any, must Tan recognize? b. What basis will Tan Corporation have in the land? c. Within one year of the contribution, Tan purchases equipment for $1.6 million. What basis will Tan have in the equipment?

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Question 10

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

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Question 11

Gabriella and Juanita form Luster Corporation. Gabriella transfers cash of $50,000 for 50 shares of stock, and Juanita transfers information concerning a proprietary process basis of zero and fair market value of $50,000) for 50 shares of stock.

(Multiple Choice)

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Question 12

Nick exchanges property basis of $100,000; fair market value of $3 million) for 65% of the stock of Yellow Corporation. The other 35% of the stock is owned by Gloria who acquired it several years ago. What are the tax consequences to Nick?

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Question 13

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the 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?

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Question 14

George transfers cash of $150,000 to Finch Corporation, a newly formed corporation, for 100% of the stock in Finch worth $80,000 and debt in the amount of $70,000, payable in equal annual installments of $7,000 plus interest at the rate of 9% per annum. In the first year of operation, Finch has net taxable income of $40,000. If Finch pays George interest of $6,300 and $7,000 principal payment on the note:

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Question 15

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

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Question 16

Rick transferred the following assets and liabilities to Warbler Corporation. Fair Market Adjusted Basis Value Building \ 210,000 \ 225,000 Equipment 45,000 75,000 Trucks 15,000 30,000 Mortgage (held for four years) on building 30,000 30,000 In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding fair market value of $225,000).

(Multiple Choice)

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Question 17

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.

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Question 18

Rachel owns 100% of the stock of Cardinal Corporation. In the current year Rachel transfers an installment obligation, tax basis of $180,000 and fair market value of $350,000, for additional stock in Cardinal worth $350,000.

(Multiple Choice)

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Question 19

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.

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Question 20

Showing 1 - 20 of 108

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?

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

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.

To encourage the development of an industrial park, a county donates land to Ecru Corporation. The donation results in gross income to Ecru.

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

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

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.

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.

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

Gabriella and Juanita form Luster Corporation. Gabriella transfers cash of $50,000 for 50 shares of stock, and Juanita transfers information concerning a proprietary process basis of zero and fair market value of $50,000) for 50 shares of stock.

Nick exchanges property basis of $100,000; fair market value of $3 million) for 65% of the stock of Yellow Corporation. The other 35% of the stock is owned by Gloria who acquired it several years ago. What are the tax consequences to Nick?

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

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.

Rachel owns 100% of the stock of Cardinal Corporation. In the current year Rachel transfers an installment obligation, tax basis of $180,000 and fair market value of $350,000, for additional stock in Cardinal worth $350,000.

Understanding and Working With the Federal Tax Law

The Deduction for Qualified Business Income for Pass-Through Entities

Corporations: Introduction and Operating Rules

Corporations: Earnings and Profits and Dividend Distributions

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, Operations, and Basis

Partnerships: Distributions, Transfer of Interests, and Terminations

S Corporations

Comparative Forms of Doing Business

Taxes on the Financial Statements

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

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