Exam 4: 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.

Carmen and Carlos form White Corporation.Carmen transfers cash of $100,000 for 100 shares in White.Carlos transfers property (basis of $20,000 and fair market value of $80,000)and agrees to serve as manager of White Corporation for one year;in return,Carlos receives 100 shares in White.The value of Carlos's services is $20,000.White Corporation can deduct $20,000 as compensation expense for the value of the services Carlos will render.

Eve transfers property (basis of $120,000 and fair market value of $400,000)to Green Corporation for 80% of its stock (worth $350,000)and a long-term note (worth $50,000),executed by Green Corporation and made payable to Eve.As a result of the transfer:

Joe and Kay form Gull Corporation.Joe transfers cash of $250,000 for 200 shares in Gull Corporation.Kay transfers property with a basis of $50,000 and fair market value of $240,000.She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation.The value of Kay's services is $10,000.With respect to the transfer:

Allen transfers marketable securities with an adjusted basis of $120,000,fair market value of $300,000,for 85% of the stock of Heron Corporation.In addition,he receives cash of $40,000.Allen recognizes a capital gain of $40,000 on the transfer.

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.

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.

Rita forms Finch Corporation by transferring land (basis of $125,000;fair market value of $750,000)which is subject to a mortgage of $375,000.Two weeks prior to incorporating Finch,Rita borrows $125,000 for personal purposes and gives the lender a second mortgage on the land.Finch Corporation issues stock worth $250,000 to Rita and assumes the two mortgages on the land.What are the tax consequences to Rita and to Finch Corporation?

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:

Penny,Miesha,and Sabrina transfer property to Owl Corporation for 75% of its stock.Nancy,their attorney,receives 25% of the stock in Owl for legal services rendered in incorporating the business.What are the tax consequences of these transactions? How should this transaction have been handled?

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351,the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

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:

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:

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:

The use of § 351 is not limited to the initial formation of a corporation,and it can apply to later transfers as well.

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

Perry organized Cardinal Corporation 10 years ago by contributing property worth $2 million (basis of $450,000)for 2,500 shares of stock in Cardinal,representing 100% of the stock in the corporation.Perry later gave each of his children,Brittany and Julie,750 shares of stock in Cardinal Corporation.In the current year,Perry transfers property worth $600,000 (basis of $150,000)to Cardinal for 1,000 shares in the corporation.What gain,if any,will Perry recognize on the transfer?

Rick transferred the following assets and liabilities to Warbler Corporation. In return,Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000).

Nancy,Guy,and Rod form Goldfinch Corporation with the following consideration.

A transferor who receives stock for both property and services cannot be included in the control group in determining whether an exchange meets the requirements of § 351.