Exam 4: Corporations: Organization and Capital Structure

Four years ago,Don,a single taxpayer,acquired stock in a corporation that qualified as a small business corporation under § 1244,at a cost of $60,000.Don wants to give his son,Ron,$20,000 to help finance Ron's college education.The stock is currently worth $20,000.Don is considering selling the stock in the current year for $20,000 and giving the cash to Ron.As an alternative,Don could give the stock to Ron and let Ron sell it for $20,000.Which alternative should Don choose?

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a §351 setting?

Mary transfers equipment (basis of $25,000 and fair market value of $120,000)to White Corporation. In return,Mary receives 80% of White Corporation's stock (worth $70,000)and an automobile (fair market value of $15,000). In addition,there is an outstanding mortgage of $35,000 (taken out 5 years ago)on the equipment,which White Corporation assumes. With respect to this transaction:

Nick exchanges property (basis of $100,000; fair market value of $3,000,000),for 75% of the stock of Yellow Corporation. The other 25% of the stock is owned by Gloria who acquired it several years ago. What are the tax consequences to Nick?

Mitchell and Lane form Green Corporation. Mitchell transfers property (basis of $105,000 and fair market value of $90,000)while Lane transfers land (basis of $8,000 and fair market value of $75,000)and $15,000 of cash. Each receives 50% of Green Corporation's stock (total value of $180,000). As a result of these transfers:

In a § 351 transaction,Gerald transfers equipment worth $85,000 (basis of $120,000)in exchange for all of the Rust Corporation stock. Gerald's stock basis is $120,000 and Rust's basis in the equipment is $120,000.

A secret process and patentable inventory both constitute "property" under § 351. Consequently,neither gain nor loss is recognized on the transfer of such "property" to a controlled corporation.

In 2001,Donna transferred assets (basis of $300,000 and fair market value of $250,000)to Egret Corporation in return for 200 shares of § 1244 stock. Due to § 351,the transfer was nontaxable; therefore,Donna's basis in the Egret stock is $300,000. In 2002,Donna sells 100 of these shares to Walter (a family friend)for $100,000. In 2008,Egret Corporation files for bankruptcy,and its stock becomes worthless. a.How much loss may Donna recognize in 2002 and 2008? What is the nature of this loss? [Note: Donna is married and always files a joint return.] b.How much loss may Walter (a single taxpayer) recognize in 2008, and what is the nature of such loss?

Rob and Sharon form Swallow Corporation with the following investments. Each receives 50% of Swallow's stock.In addition,Sharon receives cash of $40,000.One result of these transfers is that Sharon has a:

Kim owns 100% of the stock of Cardinal Corporation.In the current year Kim transfers an installment obligation,tax basis of $30,000 and fair market value of $200,000,for additional stock in Cardinal worth $200,000.

In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville,Tennessee,the city donates land (fair market value of $400,000)and cash of $100,000 to the corporation. Several months after the donation,Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville)on the construction of a new plant located on the donated land.