Exam 2: Corporate Formations and Capital Structure

Identify which of the following statements is true.

In which of the following independent situations is the Sec. 351 control requirement met? a) Jane transfers property to Jet Corporation for 75% of Jet Corporation's stock, and Susan provides services to J Corporation for the remaining 25% of Jet Corporation stock. b) Paul transfers property to Pride Corporation for 60% of Pride's stock, and Bob transfers property worth $15,0 performs services worth $25,000 for the remaining 40% of Pride's stock. c) Herb and his wife Carolyn each have owned 50% of the 100 outstanding shares of Wykert Corporation stock was formed three years ago. In the current year, their daughter, Cindy, transfers property to Wykert Corporation newly issued shares of Wykert stock. d) John and Pam develop a plan to form PJ Corporation on May 2 of this year. John transfers property worth $5 for 50 shares of PJ Corporation stock. As part of the single plan to incorporate, Pam transfers $50,000 cash for 50 of PJ Corporation stock on July 1. e) Assume the same facts as in Part (d), except that John has a prearranged plan to sell 30 of his shares to Steven September 1.

Azar, who owns 100% of Hat Corporation, transfers land having a $50,000 FMV and a $30,000 adjusted basis to Hat. In return, Azar receives additional shares of Hat common stock having a $40,000 FMV and Cap Corporation common stock having a $10,000 FMV. The Cap Corporation common stock, a capital asset, has a $2,500 basis on Hat's books. What is Azar's realized and recognized gain? Does Hat Corporation recognize a gain on the stock transfer to Azar?

In accordance with the rules that apply to corporate formation, which one of the following features does not make an issue of preferred stock "nonqualified"?

Tanicia owns all 100 shares of Midwest Corporation's stock, valued at $100,000. Gwen owns property that has a $15,000 adjusted basis and a $100,000 FMV. Gwen contributes the property to Midwest Corporation in exchange for 100 shares of newly issued Midwest stock. Does Sec. 351 apply to Gwen's exchange? What is the amount of her realized gain or loss? How much is recognized?

This year, John, Meg, and Karen form Frost Corporation. John contributes land purchased as an investment four years ago for $15,000 that has a $30,000 FMV in exchange for 30 shares of Frost stock. Meg contributes machinery (Sec. 1231 property) purchased four years ago and used in her business having a $35,000 adjusted basis and a $30,000 FMV in exchange for 30 shares of Frost stock. Karen contributes services worth $20,000 in exchange for 20 shares of Frost stock. a) What is the amount of John's recognized gain or loss? b) What is John's basis in his Frost shares? When does his holding period begin? c) What is the amount of Meg's recognized gain or loss? d) What is Meg's basis in her Frost shares? When does her holding period begin? e) How much income, if any, must Karen recognize? f) What is Karen's basis in her Frost shares? When does her holding period begin? g) What is Frost Corporation's basis in the land and the machinery? When does its holding period begin? How Frost Corporation treat the amount paid to Karen for her services?

Mario and Lupita form a corporation in a transaction coming under Sec. 351. Lupita transfers property with an adjusted basis of $150,000 and an FMV of $200,000 in exchange for one- half of the stock. The property has an $80,000 mortgage, which the corporation assumes. Lupita has a recognized gain of

Norman transfers machinery that has a $45,000 basis and a $105,000 FMV and $30,000 in money to Elnor Corpor exchange for 50 shares of Elnor stock. The machinery, used in Norman's business, originally cost him $150,000 an subject to an $84,000 liability which Elnor Corporation assumes. Kate exchanges $51,000 cash for the remaining 5 of Elnor stock. a) What is the amount and character of Norman's recognized gain or loss? b) What is his basis in the Elnor stock? c) What is Elnor's basis in the machinery? d) What is the amount and character of Kate's recognized gain or loss? e) What is Kate's basis in the Elnor stock? f) When do Norman and Kate's holding periods for their stock begin?

What are the tax consequences to Whitney who owns 50% of Museum Corporation, a qualifying S corporation that is a calendar- year entity, if Museum Corporation reports $60,000 of taxable income? How would your answer change if Museum Corporation reported a $40,000 loss?

Discuss the IRS reporting requirements under Sec. 351.

Ralph transfers property with an adjusted basis of $65,000 and an FMV of $70,000 to Lake Corporation in a Sec. 351 transaction. Ralph receives stock worth $60,000 and a short- term note having a $10,000 FMV. Ralph's basis in the stock is

If a corporation's total adjusted bases for all properties transferred exceed the total FMV of the properties, the corporation's bases in the property is limited to FMV if no election is made.

Frans and Arie own 75 shares and 25 shares of Vogel Corporation stock, respectively. There are no other owners. Frans transfers property with a $30,000 adjusted basis and a $50,000 FMV to Vogel Corporation in exchange for an additional 25 shares of Vogel stock. Does this property- for- stock exchange qualify for Sec. 351 treatment?

For the last four years, Bob and Ellen have each owned 100 of the 200 outstanding shares of Racer Corporation's stock. Bob transfers land having a $10,000 basis and a $30,000 FMV to Racer for an additional 30 shares of stock, and Ellen transfers $2,000 for an additional two shares of stock. What is the amount of gain or loss that Bob must recognize on the exchange? If the transaction does not comply with the Sec. 351 requirements, how can it be made to comply?

Jerry transfers two assets to a corporation as part of a Sec. 351 exchange. The first asset has an adjusted basis of $70,000 and an FMV of $50,000. The second asset has an adjusted basis of $70,000 and an FMV of $150,000. The FMV of the stock received is $180,000, and he also receives $20,000 cash. The realized and recognized gain on the second asset is

On January 20 of the current year, a group of ten individuals organize an LLC to conduct an ink- making business in Florida. This year, the LLC is an eligible entity under the check- the- box regulations. How will the LLC be taxed?

Upon formation of a corporation, its assets have the same bases for book and tax purposes.

Several years ago, John acquired 200 shares of Jersey Corporation stock directly from the corporation for $150,000 in cash. This year, he sold the stock to Bill for $85,000. What tax issues should John consider with respect to the stock sale?

Ra Corporation issues a twenty- year obligation at its $1,000 face amount. Rames purchases the obligation for $1,000 on the issue date. Due to a decline in interest rates, Ra calls the obligation by paying $1,010 to each of the holders of the twenty- year obligations. What is the tax treatment of the $1,010 by Ra and Rames?

Demarcus is a 50% partner in the DJ partnership. DJ has taxable income for the year of $200,000. Demarcus received a $75,000 distribution from the partnership. What amount of income related to DJ must Demarcus recognize?