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

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

Erica transfers land worth $500,000, basis of $100,000, to a newly formed corporation, Robin Corporation, for all of Robin's stock, worth $300,000, and a 10-year note.The note was executed by Robin and made payable to Erica in the amount of $200,000.As a result of the transfer:

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).

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 a subtraction on Schedule M-1?

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.

Kim, a real estate dealer, and others form Eagle Corporation under § 351.Kim contributes inventory (land held for resale) in return for Eagle stock.The holding period for the stock includes the holding period of the inventory.

During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000.How much is Sparrow's income tax liability for the year?

Mary transfers a building (adjusted basis of $15,000 and fair market value of $90,000) to White Corporation.In return, Mary receives 80% of White Corporation's stock (worth $65,000) and an automobile (fair market value of $5,000).In addition, there is an outstanding mortgage of $20,000 (taken out 15 years ago) on the building, which White Corporation assumes.With respect to this transaction:

Jake, the sole shareholder of Peach Corporation (a C corporation) has the corporation pay him $100,000.For income tax purposes, Jake would prefer to have the payment treated as a dividend instead of salary.

In the current year, Red Corporation (a calendar year C 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 $20,000.Which of the following statements is correct?

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

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.

On December 31, 2019, 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, 2020.For Flamingo's 2019 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1.

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.

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

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.Regarding these transfers:

Orange Corporation, a calendar year C corporation, owns stock in White Corporation and has net operating income of $400,000 for the current year.White Corporation pays Orange a dividend of $60,000.What amount of dividends received deduction may Orange claim if it owns 45% of White stock (assuming Orange's dividends received deduction is not limited by its taxable income)?

When a taxpayer incorporates her business, she transfers several liabilities to the corporation.If one of the liabilities is personal in origin, the release of only that liability is treated as boot.

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.

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.