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

Which of the following statements is correct regarding the taxation of C corporations?

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:

The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.

Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services.During the current year, White has operating income of $320,000 and operating expenses (excluding salary) of $150,000.Further, White Corporation pays Nancy a salary of $100,000.The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket regardless of any income from White.Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.)

Rhonda and Marta form Blue Corporation.Rhonda transfers land (basis of $55,000 and fair market value of $180,000) for 50 shares plus $20,000 cash.Marta transfers $160,000 cash for 50 shares in Blue Corporation.

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.

George (an 80% shareholder) has made loans to Mountainview Corporation that become worthless in the current year.George is not employed by Mountainview.

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:

An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.

Donghai transferred the following assets to Starling Corporation. In exchange, Donghai received 50% of Starling Corporation's only class of stock outstanding.The stock has no established value.However, all parties believe that the value of the stock Donghai received is the equivalent of the value of the assets she transferred.The only other shareholder, Rick, formed Starling Corporation five years ago.

A shareholder's holding period for stock received under § 351 can include the holding period of the property transferred to the corporation.

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:

Rajib is the sole shareholder of Cardinal Corporation, a calendar year S corporation.In the current year, Cardinal generated a net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib.Rajib must report the Cardinal Corporation profit of $350,000 on his Federal income tax return.

In the current year, Tern, Inc., a calendar year C corporation, has $9 million of adjusted taxable income, $300,000 of business interest income, zero floor plan financing interest, and $3.2 million of business interest expense.Tern has average gross receipts for the prior three-year period of $45 million.Which of the following statements is correct about the treatment of Tern's business interest expense?

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

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

Carol and Candace are equal partners in Peach Partnership.In the current year, Peach had a net profit of $75,000 ($250,000 gross income - $175,000 operating expenses) and distributed $25,000 to each partner.Peach must pay tax on $75,000 of income.

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.

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 shareholder contributes land to his wholly owned corporation but receives no stock in return.The corporation has a zero basis in the land.