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.

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:

Tara incorporates her sole proprietorship, transferring it to newly formed Black Corporation.The assets transferred have an adjusted basis of $240,000 and a fair market value of $300,000.Also transferred was $10,000 in liabilities, $1,000 of which was personal and the balance of $9,000 being business related.In return for these transfers, Tara receives all of the stock in Black Corporation.

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.

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.

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

Sean, a sole proprietor, is engaged in a service business and uses the cash basis of accounting.In the current year, Sean incorporates his business by forming Aqua Corporation.In exchange for all of its stock, Aqua receives: assets (basis of $400,000 and fair market value of $2 million), trade accounts payable of $110,000, and loan due to a bank of $390,000.The proceeds from the bank loan were used by Sean to provide operating funds for the business.Aqua Corporation assumes all of the liabilities transferred to it.

Amy owns 20% of the stock of Wren Corporation, which she acquired several years ago at a cost of $10,000.Amy is Vice-President of Wren and earns a salary of $80,000 annually.Last year, Wren Corporation was experiencing financial problems, and Amy loaned the corporation $25,000.In the current year, Wren becomes bankrupt, and both her stock investment and the loan become worthless.Amy has a nonbusiness bad debt deduction this year of $25,000.

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?

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.

In 2005, Donna transferred assets (basis of $300,000 and fair market value of $250,000) to Egret Corporation in return for 200 shares of § 1244 stock. Due to § 351, the transfer was nontaxable; therefore, Donna's basis in the Egret stock is $300,000. In 2006, Donna sells 100 of these shares to Walter (a family friend) for $100,000. In 2012, Egret Corporation files for bankruptcy, and its stock becomes worthless.

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.

Earl and Mary form Crow Corporation.Earl transfers property, basis of $200,000 and value of $1,600,000, for 50 shares in Crow Corporation.Mary transfers property, basis of $80,000 and value of $1,480,000, and agrees to serve as manager of Crow for one year; in return Mary receives 50 shares of Crow.The value of Mary's services is $120,000.With respect to the transfers: