Exam 4: Corporations: Organization and Capital Structure

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:

If a shareholder owns stock received as a gift from her mother, it cannot be § 1244 stock.

Carl transfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000. The land, which has a basis to Carl of $70,000, is worth $160,000.

What are the tax consequences if an individual investor incurs a loss on the following:

Shawn transfers property (basis of $40,000 and fair market value of $35,000) to Condor Corporation in exchange for § 1244 stock. The transfer qualifies as a nontaxable exchange under § 351; therefore, Shawn's basis in the Condor stock is $40,000. Five years later, Shawn sells the Condor stock for $25,000. With respect to the sale, Shawn has:

In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable.

Rosa, the sole shareholder of Robin Corporation, contributes land (basis of $40,000 and fair market value of $100,000) to the corporation but does not receive additional stock. Neither Rosa nor Robin Corporation will have to recognize gain as a result of this transfer.

Sarah and Emily form Red Corporation with the following investments: Sarah transfers computers worth $200,000 (basis of $80,000), while Emily transfers real estate worth $180,000 (basis of $40,000) and services (worth $20,000) rendered in organizing the corporation. Each is issued 600 shares in Red Corporation. With respect to the transfers:

The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.

Tim, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Wren Corporation. With respect to this transaction:

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000.

In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder.

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:

When forming a corporation, a transferor-shareholder may choose to receive some corporate debt along with stock. Identify some of the issues the transferor must consider when deciding whether debt should be a part of the transaction.

Nancy, Guy, and Rod form Goldfinch Corporation with the following consideration.

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 corporation's holding period for property received under § 351 includes the holding period of the transferor shareholder.

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?

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.

Five years ago, Joe, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244, at a cost of $55,000. Joe wants to give his son, Jake, $15,000 to help finance Jake's college education. The stock is currently worth $15,000. Joe is considering selling the stock in the current year for $15,000 and giving the cash to Jake. As an alternative, Joe could give the stock to Jake and let Jake sell it for $15,000. Which alternative should Joe choose?