Exam 2: Corporate Formations and Capital Structure

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?

Sarah has advanced money to her corporation.What tax issues should she consider with respect to this money?

Identify which of the following statements is true.

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 about a partnership is true?

Anton,Bettina,and Caleb form Cage Corporation.Each contributes appreciated property worth $10,000 for one-third of the Cage stock.Before the exchange,Anton arranges to sell his stock to Darma as soon as he receives it.Does Sec.351 apply?

Frans and Arie own 75 shares and 25 shares of Vogel Corporation stock,respectively.There are no other owners.Frans transfers property with a $30,000 adjusted basis and a $50,000 FMV to Vogel Corporation in exchange for an additional 25 shares of Vogel stock.Does this property-for-stock exchange qualify for Sec.351 treatment?

Tanicia owns all 100 shares of Midwest Corporation's stock,valued at $100,000.Gwen owns property that has a $15,000 adjusted basis and a $100,000 FMV.Gwen contributes the property to Midwest Corporation in exchange for 100 shares of newly issued Midwest stock.Does Section 351 apply to Gwen's exchange? What is the amount of her realized gain or loss? How much is recognized?

Identify which of the following statements is false.

Which of the following statements is incorrect?

For Sec.351 purposes,the term "property" does not include

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?

What is the tax treatment for a contribution of capital to a corporation by a nonshareholder?

Jeremy operates a business as a sole proprietorship.The proprietorship uses the cash method of accounting.He decides to incorporate and transfers the assets and liabilities of the sole proprietorship to the newly formed corporation in exchange for its stock.The assets,which include $10,000 of accounts receivable with a zero basis,have a basis of $20,000 and an FMV of $40,000.The liabilities include accounts payable of $12,000,which will be deductible when paid,and a note payable on medical equipment of $7,000.Jeremy's basis for his stock is

Zoe Ann transfers machinery having a $36,000 adjusted basis and a $70,000 FMV for all 100 shares of Zeema Corporation's stock.Before the transfer,Zoe Ann used the machinery in her business.She originally paid $50,000 for the machinery and claimed $14,000 of depreciation before transferring the machinery.Zoe Ann recaptures no depreciation on the transfer and the recapture potential is transferred to Zeema Corporation.Zeema sells the machine for $66,000 after it had depreciated the machine an additional $4,000.What is Zeema's gain on the machine and what is its character?

Severs Corporation employs Susan as an Advertising Director.Her annual compensation from Severs Corporation is $100,000.Severs Corporation is experiencing financial problems,and Susan lends the corporation $50,000 in 2008 in an attempt to help it through its financial difficulties.Severs Corporation subsequently declares bankruptcy,and in 2010 Susan and the other creditors receive 10 cents on each dollar they are owed.What is the amount and character of Susan's loss?

Demarcus is a 50% partner in the DJ partnership.DJ has taxable income for the year of $200,000.Demarcus received a $75,000 distribution from the partnership.What amount of income related to DJ must Demarcus recognize?

Matt and Sheila form Krupp Corporation.Matt contributes property with an FMV of $55,000 and a basis of $35,000.Sheila contributes property with an FMV of $75,000 and a basis of $40,000.Matt sells his stock to Paul shortly after the exchange.The transaction will

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

Ralph and Yolanda purchased 20% of the initial offering of Major Corporation common stock for $150,000.Major Corporation is a qualifying small business corporation and the stock qualifies as Sec.1244 stock.Ten months later,Major Corporation files for bankruptcy and the shareholders are notified that the stock is worthless.Ralph and Yolanda,who are married and file a joint return,have a