Exam 18: Corporations: Organization and Capital Structure

To ease a liquidity problem, all of the shareholders of Osprey Corporation contribute additional cash to its capital.Osprey has no tax consequences from the contribution.

Issues relating to basis arise when a taxpayer is involved in a § 351 transaction. Describe the underlying rules, and the purpose they serve.

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:

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:

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:

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?

Ashley, a 70% shareholder of Wren Corporation, transfers property with a basis of $250,000 and a fair market value of $900,000 to Wren Corporation for additional stock.Ashley owns 78% of Wren after the transfer.Two other shareholders in Wren transfer a nominal amount of property to Wren along with Ashley's transfer so that Ashley and the two shareholders own 90% of the Wren stock after the transfer.Does Ashley have taxable gain on the transfer?

Dawn, a sole proprietor, was engaged in a service business and reported her income on a cash basis.Later, she incorporates her business and transfers the assets of the business to the corporation in return for all the stock in the corporation plus the corporation's assumption of the liabilities of her proprietorship.All the receivables and the unpaid trade payables are transferred to the newly formed corporation.The assets of the proprietorship had a basis of $105,000 and fair market value of $300,000.The trade accounts payable totaled $25,000.There was a note payable to the bank in the amount of $95,000 that the corporation assumes.The note was issued for the purchase of computers and other business equipment.

In order to retain the services of Eve, a key employee in Ted's sole proprietorship, Ted contracts with Eve to make her a 30% owner.Ted incorporates the business receiving in return 100% of the stock.Three days later, Ted transfers 30% of the stock to Eve.Under these circumstances, § 351 will not apply to the incorporation of Ted's business.

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.

Carl and Ben form Eagle Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Eagle.Ben transfers a secret process with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Eagle.Carl will have a tax basis of $50,000 in his stock in Eagle Corporation, but Ben's basis in his stock will be zero.

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 (basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

Kevin and Nicole form Indigo Corporation with the following transfers: inventory from Kevin (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo. The corporation's stock is distributed equally to Kevin and Nicole. As a result of these transfers:

In determining whether § 357(c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

All accounts payable of a cash basis taxpayer are included as liabilities under § 357(c) in determining whether liabilities exceed basis.

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

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.

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

Linda formed Pink Corporation with an investment of $200,000 cash, for which she received $20,000 in stock and $180,000 in 5% interest-bearing bonds maturing in ten years.A few years later Linda loaned Pink an additional $40,000 on open account.Pink becomes insolvent in the current year and is adjudged bankrupt.Linda was the president of Pink Corporation and was paid an annual salary of $35,000 for the past three years.Linda has no other employment.How will Linda treat her losses for tax purposes?

As part of a § 351 transfer, a shareholder receives boot.If a realized loss resulted, none of the boot is taxed.