Deck 4: Corporations: Organization and Capital Structure

Question 1

Doreen incorporates her sole proprietorship, transferring it to newly formed Thistle Corporation.The assets transferred have an adjusted basis of $300,000 and a fair market value of $330,000.Also transferred was $30,000 in liabilities, $2,000 of which was personal and the balance of $28,000 being business related.In return for these transfers, Doreen receives all of the stock in Thistle Corporation.

A)Thistle Corporation has a basis of $270,000 in the property.
B)Thistle Corporation has a basis of $300,000 in the property.
C)Doreen's basis in the Thistle Corporation stock is $300,000.
D)Doreen's basis in the Thistle Corporation stock is $330,000.
E)None of the above.

Answer 1

C

Question 2

Charlie incorporates his business by transferring property with a basis of $250,000 for 200 shares of stock.The stock qualifies as § 1244 stock.Charlie later gives 100 shares to his daughter, Raquel when the stock was worth $400,000.Eventually the business fails, and the corporation becomes bankrupt in the current year.Charlie files a joint return in the current year.Raquel files as a single person.With respect to the worthless stock:

A)Charlie has ordinary loss of $100,000.
B)Raquel has an ordinary loss of $125,000.
C)Charlie has a capital loss of $125,000.
D)Charlie has ordinary loss of $125,000.
E)None of the above.

Answer 2

A

Question 3

Arielle owns 100% of the stock of Heather Corporation.In the current year Arielle transfers an installment obligation, tax basis of $40,000 and fair market value of $100,000, for additional stock in Heather worth $100,000.

A)Arielle recognizes no taxable gain on the transfer.
B)Arielle has a taxable gain of $60,000.
C)Arielle has a taxable gain of $100,000.
D)Arielle has a basis of $100,000 in the additional stock she received in Heather Corporation.
E)None of the above.

Answer 3

A

Question 4

Taylor transfers land worth $300,000, basis of $200,000, to a newly formed corporation, Rosemary Corporation, for all of Rosemary's stock, worth $250,000, and a 10-year note.The note was executed by Rosemary and made payable to Taylor in the amount of $50,000.As a result of the transfer:

A)Taylor does not recognize gain.
B)Taylor recognizes gain of $50,000.
C)Rosemary Corporation has a basis of $200,000 in the land.
D)Rosemary Corporation has a basis of $300,000 in the land.
E)None of the above.

Question 5

Broderick and Rosie form Basil Corporation.Broderick transfers property (basis of $400,000 and fair market value of $300,000) while Rosie transfers land (basis of $150,000 and fair market value of $280,000) and $20,000 of cash.Each receives 50% of Basil's stock.As a result of these transfers:

A)Broderick has a recognized loss of $100,000, and Rosie has a recognized gain of $130,000.
B)Neither Broderick nor Rosie has any recognized gain or loss.
C)Broderick has no recognized loss, but Rosie has a recognized gain of $130,000.
D)Basil Corporation will have a basis in the land of $280,000.
E)None of the above.

Question 6

Ashley transferred a building (adjusted basis of $70,000 and fair market value of $180,000) to Lavender Corporation.In return, Ashley received 80% of Lavender Corporation's stock (worth $68,000) and an automobile (fair market value of $32,000).In addition, there is an outstanding mortgage of $80,000, held for 5 years, on the building that Lavender Corporation assumed.With respect to this trans?action:

A)Ashley has no recognized gain.
B)Ashley's recognized gain is $32,000.
C)Ashley's recognized gain is $42,000.
D)Lavender Corporation's basis in the building is $70,000.
E)None of the above.

Question 7

In order to induce Prairie Corporation to build a new manufacturing facility in Billings, the city donates land (fair market value of $400,000) and cash of $50,000 to the corporation.Within several months of the donation, Prairie Corporation spends $350,000 (which includes the $50,000 received from Billings) on the construction of a new plant located on the donated land.

A)Prairie must recognize income of $50,000 as to the donation.
B)Prairie will have a zero basis in the land and a basis of $50,000 in the plant.
C)Prairie must recognize income of $350,000 as to the donation.
D)Prairie will have a zero basis in the land and a basis of $300,000 in the plant.
E)None of the above.

Question 8

Michael and Freddy form Willow Corporation.Michael transfers property (basis of $175,000 and fair market value of $100,000) while Freddy transfers land (basis of $50,000 and fair market value of $90,000) and $10,000 in cash.Each receives 50% of Willow Corporation's stock, which is worth a total of $200,000.As a result of these transfers:

A)Michael has a recognized loss of $75,000, and Freddy has a recognized gain of $40,000.
B)Neither Michael nor Freddy has any recognized gain or loss.
C)Michael has no recognized loss, but Freddy has a recognized gain of $40,000.
D)Willow Corporation will have a basis in the land of $90,000.
E)None of the above.

Question 9

Diana transfers property worth $275,000, basis of $100,000, to Sycamore Corporation for 80% of the stock in Sycamore, worth $150,000, and a long-term note, executed by Sycamore Corporation and made payable to Diana, worth $125,000.

A)Diana recognizes no gain on the transfer.
B)Diana recognizes a gain of $125,000 on the transfer.
C)Diana recognizes a gain of $150,000 on the transfer.
D)Diana recognizes a gain of $175,000 on the transfer.
E)None of the above.