Exam 4: Corporations: Organization and Capital Structure

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

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

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.

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

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.

In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville,Tennessee,the city donates land (fair market value of $400,000)and cash of $100,000 to the corporation.Several months after the donation,Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville)on the construction of a new plant located on the donated land.

Kim,a real estate dealer,and others form Eagle Corporation under § 351.Kim contributes inventory (land held for resale)in return for Eagle stock.The holding period for the stock includes the holding period of the inventory.

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.

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

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.

For § 351 purposes,stock rights and stock warrants are included in the definition of "stock."

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?

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

Four individuals form Chickadee Corporation under § 351.Two of these individuals,Jane and Walt,made the following contributions: Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

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.

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

If both §§ 357(b)and (c)apply to the same transfer (i.e. ,the liability is not supported by a bona fide business purpose and also exceeds the basis of the properties transferred),§ 357(c)predominates.

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?

When depreciable property is transferred to a controlled corporation under § 351,any recapture potential disappears and does not carry over to the corporation.

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