Exam 18: Corporations: Organization and Capital Structure

Lucy and Marta form Blue Corporation. Lucy transfers land (basis of $40,000 and fair market value of $180,000) for 50 shares plus $20,000 cash. Marta transfers $160,000 cash for 50 shares in Blue Corporation.

A secret process and patentable invention both constitute "property" under § 351.

Lucy transfers equipment (basis of $25,000 and fair market value of $120,000) to White Corporation. In return, Lucy 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:

Kathleen transferred the following assets to Mockingbird Corporation. In exchange, Kathleen received 40% of Mockingbird Corporation's only class of stock outstanding.The stock has no established value.However, all parties sincerely believe that the value of the stock Kathleen received is the equivalent of the value of the assets she transferred.The only other shareholder, Rick, formed Mockingbird Corporation five years ago.

Ann transferred land worth $500,000, with a tax basis of $150,000, to Brown Corporation, an existing entity, for 200 shares of its stock.Brown Corporation has two other shareholders, Bill and Bob, each of whom holds 100 shares.With respect to the transfer:

George transfers cash of $150,000 to Finch Corporation, a newly formed corporation, for 100% of the stock in Finch worth $80,000 and debt in the amount of $70,000, payable in equal annual installments of $7,000 plus interest at the rate of 9% per annum.In the first year of operation, Finch has net taxable income of $40,000.If Finch pays George interest of $6,300 and $7,000 principal payment on the note:

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.

Barry and Irv form Rapid Corporation. Barry transfers cash of $150,000 and equipment (basis of $300,000 and fair market value of $350,000) for 50% of Rapid's stock. Irv transfers land and building (basis of $510,000 and fair market value of $425,000) and agrees to manage the business for one year for the other 50% of Rapid's stock. The value of Irv's services for one year is $75,000.

Because services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

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

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.

To help avoid the thin capitalization problem, it is advisable to make the repayment of the debt contingent upon the corporation's earnings.

A shareholder transfers a capital asset to Red Corporation for its stock. If the transfer qualifies under § 351, Red's holding period for the asset begins on the day of the exchange.

Mitchell and Powell form Green Corporation. Mitchell transfers property (basis of $105,000 and fair market value of $90,000) while Powell 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:

Rachel owns 100% of the stock of Cardinal Corporation.In the current year Rachel transfers an installment obligation, tax basis of $180,000 and fair market value of $350,000, for additional stock in Cardinal worth $350,000.

Rita forms Finch Corporation by transferring land (basis of $125,000; fair market value of $750,000) which is subject to a mortgage of $375,000. Two weeks prior to incorporating Finch, Rita borrows $125,000 for personal purposes and gives the lender a second mortgage on the land. Finch Corporation issues stock worth $250,000 to Rita and assumes the two mortgages on the land. What are the tax consequences to Rita and to Finch Corporation?

Wade and Paul form Swan Corporation with the following investments. Wade transfers machinery (basis of $40,000 and fair market value of $100,000), while Paul transfers land (basis of $20,000 and fair market value of $90,000) and services rendered (worth $10,000) in organizing the corporation. Each is issued 25 shares in Swan Corporation. With respect to the transfers:

Nancy, Guy, and Rod form Goldfinch Corporation with the following consideration. Goldfinch issues its 500 shares of stock as follows: 250 to Nancy, 200 to Guy, and 50 to Rod.In addition, Guy gets $50,000 in cash.

Rick transferred the following assets and liabilities to Warbler Corporation. In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000).