Exam 4: Corporations: Organization and Capital Structure

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

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.

Joyce, a single taxpayer, transfers property basis of $120,000 and fair market value of $60,000) to Wren Corporation in exchange for shares of § 1244 stock. Because the transfer qualifies under § 351, Joyce takes a $120,000 basis in the Wren stock. In the current year, Joyce sells the Wren Corporation stock for $40,000. What are the consequences of the sale to Joyce?

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.

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.

Ashley, a 70% shareholder of Wren Corporation, transfers property with a basis of $250,000 and a fair market value of $900,000 to Wren Corporation for additional stock. Ashley owns 78% of Wren after the transfer. Two other shareholders in Wren transfer a nominal amount of property to Wren along with Ashley's transfer so that Ashley and the two shareholders own 90% of the Wren stock after the transfer. Does Ashley have taxable gain on the transfer?

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

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

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 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.

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:

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:

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.

Eve transfers property basis of $120,000 and fair market value of $400,000) to Green Corporation for 80% of its stock worth $350,000) and a long-term note worth $50,000) executed by Green Corporation and made payable to Eve. As a result of the transfer:

George an 80% shareholder) has made loans to Mountainview Corporation that become worthless in the current year. George is not employed by Mountainview.

Mary transfers a building adjusted basis of $15,000 and fair market value of $90,000) to White Corporation. In return, Mary receives 80% of White Corporation's stock worth $65,000) and an automobile fair market value of $5,000). In addition, there is an outstanding mortgage of $20,000 taken out 15 years ago) on the building, which White Corporation assumes. With respect to this transaction:

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 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.

When Pheasant Corporation was formed under § 351, Kristen transferred property basis of $26,000 and fair market value of $22,500) for § 1244 stock. Kristen's basis in the Pheasant stock is $26,000. Three years later, Pheasant Corporation goes bankrupt and its stock becomes worthless. Kristen, who is single, owned the stock as an investment. Kristen's loss is:

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: