Exam 2: Corporate Formations and Capital Structure

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.

Reba,a cash basis accountant,transfers all of the assets and liabilities of her practice to Able Corporation in exchange for all of Able Corporation's stock.The assets include $20,000 of accounts receivable.What is the Corporation's basis in the receivables? Will the corporation be taxed on the receivables,as they are collected?

Which of the following statements is correct?

Phil and Nick form Philnick Corporation.Phil exchanges cash and other property for 900 shares (90% of the outstanding shares)of Philnick stock.Nick performs accounting services in exchange for 100 shares of Philnick stock worth $10,000.What are the tax consequences from forming the Philnick Corporation to Phil and Nick?

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.The corporation's basis in the property is

S corporations must allocate income to shareholders based on their proportionate stock ownership.

Maria has been operating a business as a sole proprietorship for several years.She needs additional capital and wants to incorporate her business.The assets of her business (building,land,inventory,and so on)have a $400,000 adjusted basis and a $1.5 million FMV.Maria is willing to exchange the assets for 1,500 shares of Metro Corporation stock,each having a $1,000 FMV.Bill and John are each willing to invest $500,000 in Maria's business and will each receive 500 shares of stock.Why is Sec.351 important to Maria? Does it matter to Bill and John?

Chris transfers land with a basis of $40,000 to Webb Corporation in exchange for 100% of Webb's stock.At the date of the transfer,the land had a $30,000 fair market value.Absent an election by Chris,Webb's basis in the land is

This year,John,Meg,and Karen form Frost Corporation.John contributes land purchased as an investment four years ago for $25,000 that has a $30,000 FMV in exchange for 30 shares of Frost stock.Meg contributes machinery purchased four years ago and used in her business having a $50,000 adjusted basis and a $30,000 FMV in exchange for 30 shares of Frost stock.Karen contributes services worth $15,000 and $5,000 cash 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 does Frost Corporation treat the amount paid to Karen for services?

Abby owns all 100 shares of Rent Corporation's stock,valued at $10,000.Bart owns property that has a $1,500 adjusted basis and a $10,000 FMV.Bart contributes the property to Rent Corporation in exchange for 100 shares of newly issued Rent stock.Abby transfers additional property worth $10,000 for an additional 10 shares of newly issued Rent stock too.Does Sec.351 apply?

On January of the current year,Rae purchases 100% of Sun Corporation stock for $30,000.Sun Corporation reports taxable income of $25,000 in the current year,on which it pays tax of $3,750.None of the remaining $21,250 is distributed to Rae.However,on January 1 of the next year,Rae sells her stock to Lee for $51,250.What are the tax consequences to Rae of the sale?

S corporations are flow-through entities in which S income is allocated to shareholders.

Darnell,who is single,exchanges property having a $60,000 adjusted basis and a $50,000 FMV for 1,000 shares of Fox Corporation stock in a transaction qualifying under Sec.351.The stock qualifies as Sec.1244 stock.If Darnell sells his stock for $30,000,what is the amount and character of his recognized gain or loss?

Nathan is single and owns a 54% interest in the new NT Partnership,a calendar-year entity.The NT Partnership reports $100,000 of profits for its first year.Assuming Nathan is taxed at a 35% marginal tax rate on the additional income,how much tax does Nathan owe if the NT Partnership does not distribute any of its profits to him?

Stu Walker has owned all 200 shares of Lance Corporation's stock for the past six years.This year,Megan Jones contributes property with a $100,000 basis and a $160,000 FMV for 160 newly issued Lance shares.At the same time,Stu contributes $30,000 in cash for 30 newly issued Lance shares.What tax issues should Megan and Stu consider with respect to the stock acquisitions?

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?

Jermaine owns all 200 shares of Peach Corporation stock valued at $50,000.Kenya,a new shareholder,receives 200 newly issued shares from Peach Corporation in exchange for inventory with an adjusted basis of $40,000 and an FMV of $50,000.Which of the following statements is correct?

Carmen and Marc form Apple Corporation.Carmen transfers land that is Sec.1231 property,with an adjusted basis of $18,000 and an FMV of $20,000 in exchange for one-half of the Apple Corporation stock.Marc transfers equipment that originally costs $28,000 on which he has taken $5,000 in depreciation deductions.The equipment has an FMV of $25,000 and he receives one-half of the stock and a $5,000 short-term note.The transaction meets the requirements of Sec.351.Which statement below is correct?

Cherie transfers two assets to a newly-created corporation.The first asset has an adjusted basis of $40,000 and an FMV of $50,000.The second asset has an adjusted basis of $35,000 and an FMV of $25,000.Cherie receives stock with an FMV of $66,000 and $9,000 cash.Cherie must recognize a gain of