Exam 4: Corporations: Organization and Capital Structure

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.

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later,Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark City.Ann,the sole shareholder,contributes equipment (basis of $70,000 and fair market value of $200,000)to help Orange in its new operations.What are the tax consequences of these transfers to Orange Corporation?

Sarah and Tony (mother and son)form Dove Corporation with the following investments: cash by Sarah of $65,000;land by Tony (basis of $25,000 and fair market value of $35,000).Dove Corporation issues 400 shares of stock,200 each to Sarah and Tony.Thus,each receives stock in Dove worth $50,000.

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:

Similar to like-kind exchanges,the receipt of "boot" under § 351 can cause gain to be recognized.

The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.

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?

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

When incorporating her sole proprietorship,Samantha transfers all of its assets and liabilities.Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure.Under these circumstances,the entire $30,000 will be treated as boot.

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.

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:

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.

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.

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

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:

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

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

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:

In order to encourage the redevelopment of its urban center,the city of Birmingham contributes undeveloped land (fair market value of $900,000)and cash of $350,000 to Blue Corporation.Within the year,Blue constructs a new office building at the site at a cost of $850,000.