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

Question 1

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.

Answer 1

True

Question 2

Employment taxes apply to all entity forms of operating a business.As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

Answer 2

False

Question 3

Thrush Corporation files its Form 1120, which reports taxable income of $200,000 in the current year.The corporation's tax is $42,000.

Answer 3

True

Question 4

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

Question 5

Matt, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year.The Tax Court has held that $200,000 represents unreasonable compensation.Matt must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Question 6

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.

Question 7

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.

Question 8

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

Question 9

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 10

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.

Question 11

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 12

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

Question 13

Quail Corporation is a C corporation that generates net income of $125,000 during the current year.If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income.Shareholders must report the $25,000 of dividends as income.

Question 14

Donald owns a 45% interest in a partnership that earned $130,000 in the current year.He also owns 45% of the stock in a C corporation that earned $130,000 during the year.Donald received $20,000 in distributions from each of the two entities during the year.With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.

Question 15

The corporate marginal income tax rate is lower than the top individual tax rate.

Question 16

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income and are not deductible by the corporation.

Question 17

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.

Question 18

Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation.In the current year, both businesses make a net profit of $60,000.Neither business distributes any funds to the owners in the year.For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return.

Question 19

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

Question 20

Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year.Aaron, who owns 25% of Eagle, will report $2,500 of Eagle's short-term capital loss on his individual tax return.

Question 21

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.

Question 22

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 23

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.

Question 24

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 25

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

Question 26

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 27

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 28

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 29

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 30

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

Question 31

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

Question 32

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 33

If both §§ 357(b) 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), § 357(c) predominates.

Question 34

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 35

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

Question 36

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 37

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 38

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

Question 39

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

Question 40

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 41

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 42

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

Question 43

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 44

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 45

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 46

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

Question 47

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 48

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

Question 49

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

Question 50

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

Question 51

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 52

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 53

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 54

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 55

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

Question 56

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 57

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 58

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 59

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 60

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

Question 61

Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation.Canary owns 18% of the Stork Corporation stock.Assuming it is not subject to the taxable income limitation, Canary's dividends received deduction is $40,000.

Question 62

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

Question 63

No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

Question 64

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income.However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Question 65

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation.The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

Question 66

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.

Question 67

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).

Question 68

Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

Question 69

A calendar year personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $21,000.

Question 70

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

Question 71

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

Question 72

In the current year, Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation.Azul owns 25% of the Naranja Corporation stock.Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $19,500.

Question 73

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

Question 74

For purposes of the estimated tax payment rules, a "large corporation" is defined as a corporation that had taxable income of $1 million or more in any of the three preceding years.

Question 75

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

Question 76

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 77

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.

Question 78

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.

Question 79

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Question 80

The limitation on the deduction of business interest does not apply to noncorporate taxpayers.