Exam 18: Corporations: Organization and Capital Structure

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.

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

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:

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

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

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city. Ann, the sole shareholder, contributes equipment (basis of $70,000 and fair market value of $200,000) to help Orange in its new operations. What are the tax consequences of these transfers to Orange Corporation?

Tan Corporation desires to set up a manufacturing facility in the western part of the United States. After considerable negotiations with Butte, Montana, Tan accepts the following offer: land (fair market value of $4.5 million) and cash of $1.5 million. a. How much income, if any, must Tan recognize? b. What basis will Tan Corporation have in the land? c. Within one year of the contribution, Tan purchases equipment for $1.6 million. What basis will Tan have in the equipment?

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

Rick transferred the following assets and liabilities to Warbler Corporation. FairMarket AdjustedBasis Value Building \ 210,000 \ 225,000 Equipment 45,000 75,000 Trucks 15,000 30,000 Mortgage (held for four years) on building 30,000 30,000 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).

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.

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

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.

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.

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.

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.

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:

Penny, Miesha, and Sabrina transfer property to Owl Corporation for 75% of its stock. Nancy, their attorney, receives 25% of the stock in Owl for legal services rendered in incorporating the business. What are the tax consequences of these transactions? How should this transaction have been handled?

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.

When forming a corporation, a transferor-shareholder may choose to receive some corporate debt along with stock. Identify some of the issues the transferor must consider when deciding whether debt should be a part of the transaction.

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