Exam 4: Corporations: Organization and Capital Structure

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.

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.

Rita forms Finch Corporation by transferring land basis of $125,000; fair market value of $750,000) which is subject to a mortgage of $375,000. Two weeks prior to incorporating Finch, Rita borrows $125,000 for personal purposes and gives the lender a second mortgage on the land. Finch Corporation issues stock worth $250,000 to Rita and assumes the two mortgages on the land. What are the tax consequences to Rita and to Finch Corporation?

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.

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

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.

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.

Trish and Ron form Pine Corporation. Trish transfers inventory basis of $60,000 and fair market value of $110,000) for 50% of the stock in Pine. Ron transfers machinery basis of $20,000 and fair market value of $60,000) and agrees to serve as manager of Pine Corporation for one year for 50% of the stock. What are the tax consequences to Trish, Ron, and Pine Corporation?

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

Blue Corporation a seller of goods to Cedar Corporation) has made loans to Cedar Corporation, which become worthless in the current year.

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

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:

Hunter and Warren form Tan Corporation. Hunter transfers equipment basis of $210,000 and fair market value of $180,000) while Warren transfers land basis of $15,000 and fair market value of $150,000) and $30,000 of cash. Each receives 50% of Tan's stock. As a result of these transfers:

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

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.

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:

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

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 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.

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.