Deck 4: Corporations: Organization and Capital Structure

Question 1

Ruth transfers property worth $200,000 basis of $60,000) to Goldfinch Corporation. In return, she receives 80% of its stock worth $180,000) and a long-term note executed by Goldfinch and made payable to Ruth worth $20,000). Ruth will recognize no gain on the transfer.

Answer 1

False

Question 2

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

Question 5

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

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

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

Question 10

In order to retain the services of Eve, a key employee in Ted's sole proprietorship, Ted contracts with Eve to make her a 30% owner. Ted incorporates the business, receiving in return 100% of the stock. Three days later, Ted transfers 30% of the stock to Eve. Under these circumstances, § 351 will apply to the incorporation of Ted's business.

Question 11

A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation.

Question 12

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.

Question 13

Similar to like-kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

Question 14

Sofia 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.

Question 15

In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable.

Question 16

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.

Question 17

Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of
$50,000, while Maria transfers a proprietary formula basis of $0; fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.

Question 18

Similar to the like-kind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.

Question 19

The control requirement under § 351 requires that the person or persons transferring property to the corporation immediately after the transfer own stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

Question 20

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

Question 21

In structuring the capitalization of a corporation, the tax law is neutral for the investor as to debt versus equity financing.

Question 22

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.

Question 23

When incorporating her sole proprietorship, Samantha transfers all of its assets and liabilities. Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure. Under these circumstances, the entire $30,000 will be treated as boot.

Question 24

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.

Question 25

If both §§ 357b) and c) apply to the same transfer i.e., the liability is not supported by a bona fide business purpose and also exceeds the basis of the properties transferred), § 357c) predominates.

Question 26

A city contributes $500,000 to a corporation as an inducement to locate in the city. Within the next 12 months, the corporation uses the money to purchase property worth $500,000. The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

Question 27

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

Question 28

To help avoid the thin capitalization problem, it is advisable to make the repayment of the debt contingent upon the corporation's earnings.

Question 29

A taxpayer transfers assets and liabilities to a corporation in return for its stock. If the liabilities exceed the basis of the assets transferred, the taxpayer will have a negative basis in the stock.

Question 30

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.

Question 31

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.

Question 32

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351, the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

Question 33

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

Question 34

When depreciable property is transferred to a controlled corporation under § 351, any recapture potential disappears and does not carry over to the corporation.

Question 35

In general, the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer.

Question 36

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

Question 37

Because boot is generated under § 357b) i.e., the liability is not supported by a bona fide business purpose), the transferor shareholder will always have to recognize gain.

Question 38

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

Question 39

In determining whether § 357c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

Question 40

In return for legal services worth $60,000 rendered incident to its formation, Crimson Corporation issues stock to Greta, an attorney. Crimson cannot immediately deduct the value of any of this stock but instead must capitalize it as an organizational expenditure.

Question 41

A corporation's holding period for property received under § 351 includes the holding period of the transferor shareholder.

Question 42

Seoyun and Nicole form Indigo Corporation with the following transfers: inventory from Seoyun basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services worth $25,000) in organizing Indigo. The corporation's stock is distributed equally to Seoyun and Nicole. As a result of these transfers:

A) Indigo can deduct $25,000 as a business expense.
B) Nicole has a recognized gain of $55,000 on the transfer of the real estate.
C) Indigo has a basis of $360,000 in the inventory.
D) Indigo has a basis of $375,000 in the real estate.
E) None of these.

Question 43

A shareholder lends money to his corporation in his capacity as an investor. If the loans become worthless, a business bad debt results.

Question 44

Jane transfers property basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock worth $425,000) and a long-term note worth $75,000) executed by Green Corporation and made payable to Jane. As a result of the transfer:

A) Jane recognizes no gain.
B) Jane recognizes a gain of $75,000.
C) Jane recognizes a gain of $270,000.
D) Jane recognizes a gain of $320,000.
E) None of these.

Question 45

A transferor who receives stock for both property and services may not be included in the control group in determining whether an exchange meets the requirements of § 351.

Question 46

One month after Sally incorporates her sole proprietorship, she gives 25% of the stock to her children. Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement.

Question 47

Mitchell and Powell form Green Corporation. Mitchell transfers property basis of $105,000 and fair market value of $90,000) while Powell transfers land basis of $8,000 and fair market value of $75,000) and $15,000 of cash. Each receives 50% of Green Corporation's stock total value of $180,000). As a result of these transfers:

A) Mitchell has a recognized loss of $15,000, and Powell has a recognized gain of $67,000.
B) Neither Mitchell nor Powell has any recognized gain or loss.
C) Mitchell has no recognized loss, but Powell has a recognized gain of $15,000.
D) Green Corporation will have a basis in the land of $23,000.
E) None of these.

Question 48

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:

A) $0.
B) $10,000.
C) $20,000.
D) $190,000.
E) None of these.

Question 49

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.

Question 50

If a shareholder owns stock received as a gift from her mother, it cannot be § 1244 or § 1202 stock.

Question 51

Ira, a calendar year taxpayer, purchases as an investment stock in Redbird Corporation on November 3, 2018. On February 2, 2019, Redbird Corporation is declared bankrupt, and Ira's stock becomes worthless. Presuming § 1244 stock in a small business corporation) does not apply, Ira has a short-term capital loss for 2019.

Question 52

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

A) These transfers are fully taxable and not subject to § 351.
B) Ron's basis in his stock is $27,000.
C) Ron's basis in his stock is $6,000.
D) Brad's basis in his stock is $20,000.
E) None of these.

Question 53

Alan, an Owl Corporation shareholder, makes a contribution to capital of equipment to Owl, basis of $40,000 and fair market value of $50,000. Owl's basis of the equipment that Alan contributes is equal to $50,000, the property's fair market value.

Question 54

Silver Corporation receives $1 million in cash from Madison County as an inducement to expand its operations there. Within one year, Silver spends $1.5 million to enlarge its existing plant. Silver Corporation's basis in the expansion is
$500,000.

Question 55

If a corporation is thinly capitalized, all debt is reclassified as equity.

Question 56

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:

A) Ann has no recognized gain.
B) Brown Corporation has a basis of $160,000 in the land.
C) Ann has a basis of $200,000 in her 100 shares in Brown Corporation.
D) Ann has a basis of $40,000 in her 100 shares in Brown Corporation.
E) None of these.

Question 57

Under Federal tax law, a bias for corporate issuers exists in favor of debt as compared to equity when financing the operations of a corporation.

Question 58

A long-term note is treated as "boot." Thus, Eve is taxed on the value of the note received.

Question 59

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.

Question 60

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.

A) The transfers to Luster are fully taxable to both Gabriella and Juanita.
B) Juanita must recognize gain of $50,000.
C) Because Juanita is required to recognize gain on the transfer, Gabriella also must recognize gain.
D) Neither Gabriella nor Juanita will recognize gain on the transfer.
E) None of these.

Question 61

Wade and Paul form Swan Corporation with the following investments. Wade transfers machinery basis of $40,000 and fair market value of $100,000) and Paul transfers land basis of $20,000 and fair market value of $90,000) and services rendered worth $10,000) in organizing the corporation. Each is issued 25 shares in Swan Corporation. With respect to the transfers:

A) Wade has no recognized gain; Paul recognizes income/gain of $80,000.
B) Neither Wade nor Paul has recognized gain or income on the transfers.
C) Swan Corporation has a basis of $30,000 in the land transferred by Paul.
D) Paul has a basis of $30,000 in the 25 shares he acquires in Swan Corporation.
E) None of these.

Question 62

Earl and Mary form Crow Corporation. Earl transfers property, basis of $200,000 and value of $1,600,000, for 50 shares in Crow Corporation. Mary transfers property, basis of $80,000 and value of $1,480,000, and agrees to serve as manager of Crow for one year; in return Mary receives 50 shares of Crow. The value of Mary's services is $120,000. With respect to the transfers:

A) Mary will not recognize gain or income.
B) Earl will recognize a gain of $1,400,000.
C) Crow Corporation has a basis of $1,480,000 in the property it received from Mary.
D) Crow will have a business deduction of $120,000 for the value of the services Mary will render.
E) None of these.

Question 63

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:

A) George has dividend income of $13,300.
B) Finch Corporation does not have a tax deduction with respect to the payment.
C) George has dividend income of $7,000.
D) Finch Corporation has an interest expense deduction of $6,300.
E) None of these.

Question 64

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.

A) Yellow recognizes income of $100,000 as to the donation.
B) Yellow has a zero basis in the land and a basis of $450,000 in the plant.
C) Yellow recognizes income of $500,000 as to the donation.
D) Yellow has a zero basis in the land and a basis of $350,000 in the plant.
E) None of these.

Question 65

Sarah and Tony mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000; land by Tony basis of $25,000 and fair market value of $35,000). Dove Corporation issues 400 shares of stock, 200 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000.

A) Section 351 cannot apply since Sarah should have received 260 shares instead of only 200.
B) Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.
C) Tony's basis in the stock of Dove Corporation is $50,000.
D) As a result of the transfer, Tony recognizes a gain of $10,000.
E) None of these.

Question 66

Wren Corporation a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

A) Wren Corporation is not permitted a deduction for the loans.
B) The loans result in a nonbusiness bad debt deduction to Wren Corporation.
C) The loans provide Wren Corporation with a business bad debt deduction.
D) Wren claims a capital loss due to the uncollectible loans.
E) None of these.

Question 67

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.

Question 68

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:

A) Erica does not recognize gain.
B) Erica recognizes gain of $400,000.
C) Robin Corporation has a basis of $100,000 in the land.
D) Robin Corporation has a basis of $300,000 in the land.
E) None of these.

Question 69

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.

A) Rhonda's basis in the Blue Corporation stock is $55,000.
B) Blue Corporation's basis in the land is $55,000.
C) Blue Corporation's basis in the land is $180,000.
D) Rhonda recognizes a gain on the transfer of $125,000.
E) None of these.

Question 70

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel. In the first year of operation, Camel has net taxable income of $70,000. If Camel distributes $50,000 to Adam:

A) Adam has taxable income of $50,000.
B) Camel Corporation has a tax deduction of $50,000.
C) Adam has no taxable income from the distribution.
D) Camel Corporation reduces its basis in the land to $150,000.
E) None of these.

Question 71

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.

A) Rachel has a taxable gain of $180,000.
B) Rachel has a taxable gain of $170,000.
C) Rachel recognizes no gain on the transfer.
D) Rachel has a basis of $350,000 in the additional stock she received in Cardinal Corporation.
E) None of these.

Question 72

Leah transfers equipment basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation. After the transfer, Leah owns 80% of Crow's stock. Associated with the equipment is § 1245 depreciation recapture potential of $70,000. As a result of the transfer:

A) Leah recognizes ordinary income of $70,000.
B) The § 1245 depreciation recapture potential carries over to Crow Corporation.
C) The § 1245 depreciation recapture potential disappears.
D) Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000.
E) None of these.

Question 73

Donghai transferred the following assets to Starling Corporation. $\begin{array}{lll}&&\text { Fair Market }\\& \text { Adjusted Basis } & \text { Value }\\\text { Cash } & \$ 120,000 & \$ 120,000 \\\text { Machinery } & 48,000 & 36,000 \\\text { Land } & 108,000 & 144,000\end{array}$ 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) Donghai has no gain or loss on the transfer.
B) Starling Corporation has a basis of $48,000 in the machinery and $108,000 in the land.
C) Starling Corporation has a basis of $36,000 in the machinery and $144,000 in the land.
D) Donghai has a basis of $276,000 in the stock of Starling Corporation.
E) None of these.

Question 74

Four individuals form Chickadee Corporation under § 351. Two of these individuals, Jane and Walt, made the following contributions: $\begin{array}{lll}&&\text { Fair Market }\\& \text { Adjusted Basis } & \text { Value }\\\text { From Jane-Cash} & \$ 360,000 & \$ 360,000 \\\text { Patent } & -0- & 40,000 \\\text {From Walt-Equipment (depreciation claimed of \( \$ 100,000 \) ) } &240,000 & 370,000\end{array}$ Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

A) Jane must recognize income of $40,000? Walt has no income.
B) Neither Jane nor Walt recognize income.
C) Walt must recognize income of $130,000? Jane has no income.
D) Walt must recognize income of $100,000? Jane has no income.
E) None of these.

Question 75

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:

A) Gull Corporation has a basis of $240,000 in the property transferred by Kay.
B) Neither Joe nor Kay recognizes gain or income on the exchanges.
C) Gull Corporation has a compensation deduction of $10,000.
D) Gull capitalizes $10,000 as organizational costs.
E) None of these.

Question 76

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:

A) Kirby will recognize gain.
B) Helen will not recognize any gain or income.
C) Red Corporation will have a basis of $280,000 in the property it acquired from Helen.
D) Red will have a business deduction of $20,000.
E) None of these.

Question 77

Dick, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Orange Corporation. $\begin{array}{lll}&&\text { Fair Market }\\&\text { Adjusted Basis }&\text { Value }\\\text { Cash } & \$ 10,000 & \$ 10,000 \\\text { Building } & 120,000 & 175,000 \\\text { Mortgage payable secured by the building and held } & 135,000 & 135,000 \\\text { for } 15 \text { years) } & &\end{array}$ With respect to this transaction:

A) Orange Corporation's basis in the building is $120,000.
B) Dick has no recognized gain.
C) Dick has a recognized gain of $5,000.
D) Dick has a recognized gain of $10,000.
E) None of these.

Question 78

Rob and Yi form Bluebird Corporation with the following investments. $\begin{array}{lll}&&\text { Fair Market }\\&\text { Adjusted Basis }&\text { Value }\\ \text { From Rob-Cash}&\$400,000&\$400,000\\ \text { From Yi -Land}&500,000&440,000\\\end{array}$
Each receives 50% of Bluebird's stock. In addition, Yi receives cash of $40,000. One result of these transfers is that Yi has a:

A) Recognized loss of $60,000.
B) Recognized loss of $20,000.
C) Basis of $460,000 in the Bluebird stock assuming Bluebird reduces its basis in the land to $440,000).
D) Basis of $400,000 in the Bluebird stock assuming Bluebird reduces its basis in the land to $440,000).
E) None of these.

Question 79

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.

A) Albert has a recognized gain on the transfer of $140,000.
B) Albert has a recognized gain on the transfer of $80,000.
C) Albert has a recognized gain on the transfer of $60,000.
D) Gold Corporation has a basis in the land of $220,000.
E) None of these.

Question 80

Carl transfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000. The land, which has a basis to Carl of $70,000, is worth $160,000.

A) Carl will have a recognized gain on the transfer of $90,000.
B) Carl will have a recognized gain on the transfer of $30,000.
C) Cardinal Corporation will have a basis of $70,000 in the land transferred by Carl.
D) Cardinal Corporation will have a basis of $160,000 in the land transferred by Carl.
E) None of these.