Exam 18: Corporations: Organization and Capital Structure

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:

Four years ago,Don,a single taxpayer,acquired stock in a corporation that qualified as a small business corporation under § 1244,at a cost of $60,000.Don wants to give his son,Ron,$20,000 to help finance Ron's college education.The stock is currently worth $20,000.Don is considering selling the stock in the current year for $20,000 and giving the cash to Ron.As an alternative,Don could give the stock to Ron and let Ron sell it for $20,000.Which alternative should Don choose?

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

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:

Ann transferred land worth $200,000,with a tax basis of $40,000,to Brown Corporation,an existing entity,for 100 shares of its stock.Brown Corporation has two other shareholders,Bill and Bob,each of whom holds 100 shares.With respect to the transfer:

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.

What are the tax consequences if an individual investor incurs a loss on the following:

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.

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. a.Does Sean recognize any gain on the incorporation? Explain. b.What basis does Sean have in the Aqua stock? c.What basis does Aqua Corporation have in the assets it receives?

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

A city contributes $500,000 to a corporation as an inducement to locate in the city.Within the next 12 months,the corporation uses the money to purchase property.The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

Rachel owns 100% of the stock of Cardinal Corporation.In the current year Rachel transfers an installment obligation,tax basis of $180,000 and fair market value of $350,000,for additional stock in Cardinal worth $350,000.

Karen formed Grebe Corporation with an investment of $100,000 cash,for which she received $10,000 in stock and $90,000 in 7% interest-bearing bonds maturing in ten years.A few years later,Karen loaned Grebe an additional $60,000 on open account.Grebe becomes insolvent in the current year and is adjudged bankrupt.Karen was the president of Grebe Corporation and was paid an annual salary of $50,000 for the past three years.Karen has no other employment.How will Karen treat her losses for tax purposes?