Exam 18: Corporations: Organization and Capital Structure

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

Even if boot is generated under § 357(b) (i.e., the liability is not supported by a bona fide business purpose), the transferor shareholder may not have to recognize gain.

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.

What is the rationale underlying the tax deferral treatment available under § 351?

A shareholder lends money to his corporation in his capacity as an investor.If the loans become worthless, a business bad debt results.

Nick exchanges property (basis of $100,000; fair market value of $3 million), for 65% of the stock of Yellow Corporation. The other 35% of the stock is owned by Gloria who acquired it several years ago. What are the tax consequences to Nick?

Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of $50,000, while Maria transfers a secret process (basis of $0; fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.

One month after Sally incorporates her sole proprietorship, she gives 25% of the stock to her children.Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement.

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation, Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

A shareholder's holding period for stock received under § 351 includes the holding period of the property transferred to the corporation.

Isabella and Marta form Pine Corporation. Isabella transfers land (basis of $40,000 and fair market value of $180,000) for 50 shares plus $20,000 cash, while Marta transfers $160,000 cash for the other 50 shares in Pine Corporation. Pine Corporation has a basis of $40,000 in the land it receives from Isabella.

Leonard transfers equipment (basis of $40,000 and fair market value of $100,000) for additional stock in Green Corporation. After the transfer, Leonard owns 90% of the stock. Leonard had claimed depreciation of $50,000 on the equipment prior to transferring it to Green Corporation. With respect to the transfer:

If a transaction qualifies under § 351, any recognized gain is equal to the value of the boot received.