Exam 18: Corporations: Organization and Capital Structure

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.

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,but Ben's basis in his stock will be zero.

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.

Ira,a calendar year taxpayer,purchases as an investment stock in Redbird Corporation on November 3,2014.On February 2,2015,Redbird Corporation is declared bankrupt,and Ira's stock becomes worthless.Presuming § 1244 (stock in a small business corporation) does not apply,Ira has a short-term capital loss for 2015.

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.

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.

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation.After the transfer,Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

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.

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:

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?

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

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

Amy owns 20% of the stock of Wren Corporation,which she acquired several years ago at a cost of $10,000.Amy is Vice-President of Wren and earns a salary of $80,000 annually.Last year,Wren Corporation was experiencing financial problems,and Amy loaned the corporation $25,000.In the current year,Wren becomes bankrupt,and both her stock investment and the loan become worthless.Amy has a nonbusiness bad debt deduction this year of $25,000.

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later,Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark 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?

Nick exchanges property (basis of $100,000;fair market value of $3 million),for 65% of the stock of Yellow Corporation.The other 35% of the stock is owned by Gloria who acquired it several years ago.What are the tax consequences to Nick?

Beth 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.

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?

Perry organized Cardinal Corporation 10 years ago by contributing property worth $2 million (basis of $450,000) for 2,500 shares of stock in Cardinal,representing 100% of the stock in the corporation.Perry later gave each of his children,Brittany and Julie,750 shares of stock in Cardinal Corporation.In the current year,Perry transfers property worth $600,000 (basis of $150,000) to Cardinal for 1,000 shares in the corporation.What gain,if any,will Perry recognize on the transfer?

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

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.