Exam 4: Corporations: Organization and Capital Structure

Karen formed Grebe Corporation with an investment of $100,000 cash,for which she received $10,000 in stock and $90,000 in 9% interest-bearing bonds maturing in ten years.A few years later Karen loaned Grebe an additional $40,000 on open account.Grebe becomes insolvent in the current year and is adjudged bankrupt.Karen was the president of Grebe Corporation and was paid an annual salary of $30,000 for the past three years.Karen has no other employment.How will Karen treat her losses for tax purposes?

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Question 1

Correct Answer:

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If the stock is § 1244 stock,Karen has an ordinary loss on the worthless stock.Otherwise,her $10,000 stock investment is a capital loss.The IRS could argue thin capitalization to make the long-term debt equity,and thus,a capital loss.Also,it could contend that both the long-term debt (regardless of whether it can be deemed hybrid stock)and the $40,000 open account are nonbusiness bad debts and,therefore,short term capital losses.Karen would counter with the argument that the $40,000 open account is a business bad debt because the primary motive in loaning money to the corporation was to protect her employment.Although the loan is more than her annual salary,she is paid the salary continuously.Thus,in that context,the salary is more than the investment.Further,she only works for the corporation.

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

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Question 2

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False

In order to encourage the development of an industrial park,a county donates land to Ecru Corporation.The donation does not result in gross income to Ecru.

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Question 3

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True

Shawn,a sole proprietor,is engaged in a service business and uses the cash basis of accounting.In the current year,Shawn incorporates his business by forming Aqua Corporation.In exchange for all of its stock,Aqua receives: assets (basis of $380,000 and fair market value of $1.8 million),trade accounts payable of $125,000,and loan due to a bank of $375,000.The proceeds from the bank loan were used by Shawn to provide operating funds for the business.Aqua Corporation assumes all of the liabilities transferred to it. a.Does Shawn recognize any gain on the incorporation? Explain. b.What basis does Shawn have in the Aqua stock? c.What basis does Aqua Corporation have in the assets it receives?

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Question 4

Joe and Kay form Gull Corporation.Joe transfers cash of $250,000 for 200 shares in Gull Corporation.Kay transfers property with a basis of $50,000 and fair market value of $240,000.She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation.The value of Kay's services is $10,000.With respect to the transfer:

(Multiple Choice)

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Question 5

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.

(True/False)

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Question 6

Adam transfers inventory 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 $30,000.Adam recognizes a capital gain of $30,000 on the transfer.

(True/False)

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Question 7

In a § 351 transfer,a shareholder who receives boot has a realized loss.None of the boot is taxed.

(True/False)

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Question 8

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

(Multiple Choice)

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Question 9

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:

(Multiple Choice)

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Question 10

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:

(Multiple Choice)

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Question 11

Tara incorporates her sole proprietorship,transferring it to newly formed Black Corporation.The assets transferred have an adjusted basis of $240,000 and a fair market value of $300,000.Also transferred was $10,000 in liabilities,$1,000 of which was personal and the balance of $9,000 being business related.In return for these transfers,Tara receives all of the stock in Black Corporation.

(Multiple Choice)

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Question 12

For § 351 purposes,stock rights and stock warrants are included in the definition of "stock."

(True/False)

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Question 13

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

(True/False)

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Question 14

What are the tax consequences if an individual investor incurs a loss on the following: a.Stock that is not § 1244 stock. b.Stock that is § 1244 stock. c.Corporate bond. d.An uncollectible loan made to a corporation.

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Question 15

In order to encourage the development of its industrial park,Union County gives Darter Corporation land (fair market value of $800,000)and cash of $500,000. Within one year,Darter constructs a new plant at the site at a cost of $1,200,000. a.How much income, if any, must Darter Corporation recognize as a result of these transfers? b.What basis will Darter Corporation have in the land? In the plant?

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Question 16

In order to encourage the redevelopment of its urban center,the city of Birmingham contributes undeveloped land (fair market value of $900,000)and cash of $350,000 to Blue Corporation. Within the year,Blue constructs a new office building at the site at a cost of $850,000. a.How much income, if any, must Blue Corporation recognize as a result of these transfers? b.What basis will Blue Corporation have in the land? In the office building?

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Question 17

A shareholder lends money to his corporation in his capacity as an investor.If the loans become worthless,a business bad debt results.

(True/False)

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Question 18

The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.

(True/False)

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Question 19

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?

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Question 20

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

In order to encourage the development of an industrial park,a county donates land to Ecru Corporation.The donation does not result in gross income to Ecru.

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.

Adam transfers inventory 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 $30,000.Adam recognizes a capital gain of $30,000 on the transfer.

In a § 351 transfer,a shareholder who receives boot has a realized loss.None of the boot is taxed.

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

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:

For § 351 purposes,stock rights and stock warrants are included in the definition of "stock."

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

What are the tax consequences if an individual investor incurs a loss on the following: a.Stock that is not § 1244 stock. b.Stock that is § 1244 stock. c.Corporate bond. d.An uncollectible loan made to a corporation.

A shareholder lends money to his corporation in his capacity as an investor.If the loans become worthless,a business bad debt results.

The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.

Understanding and Working With the Federal Tax Law

Corporations: Introduction and Operating Rules

Corporations: Special Situations

Corporations: Earnings and Profits and Dividend Distributions

Corporations: Redemptions and Liquidations

Corporations: Reorganizations

Consolidated Tax Returns

Taxation of International Transactions

Partnerships: Formation, operation, and Basis

Partnerships: Distributions, transfer of Interests, and Terminations

S Corporations

Comparative Forms of Doing Business

Exempt Entities

Multistate Corporate Taxation

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Family Tax Planning

Income Taxation of Trusts and Estates

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