Exam 18: Corporations: Organization and Capital Structure

A taxpayer transfers assets and liabilities to a corporation in return for its stock.If the liabilities exceed the basis of the assets transferred,the taxpayer will have a negative basis in the stock.

Leah transfers equipment (basis of $400,000 and fair market value of $500,000)for additional stock in Crow Corporation.After the transfer,Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

Art,an unmarried individual,transfers property (basis of $130,000 and fair market value of $120,000)to Condor Corporation in exchange for § 1244 stock.The transfer qualifies as a nontaxable exchange under § 351 and Art's basis in the Condor stock is $130,000.Five years later,Art sells the Condor stock for $50,000.With respect to the sale,Art has:

Gabriella and Juanita form Luster Corporation.Gabriella transfers cash of $50,000 for 50 shares of stock,while Juanita transfers a secret process (basis of zero and fair market value of $50,000)for 50 shares of stock.

When consideration is transferred to a corporation in return for stock,the definition of "property" is important because tax deferral treatment of § 351 is available only to taxpayers who transfer property.

Ronald,a cash basis taxpayer,incorporates his sole proprietorship.He transfers the following items to newly created Robin Corporation. With respect to this transaction:

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.

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:

When a taxpayer incorporates her business,she transfers several liabilities to the corporation.If one of the liabilities is personal in nature,only that liability is treated as boot.

Sarah and Tony (mother and son)form Dove Corporation with the following investments: cash by Sarah of $55,000;land by Tony (basis of $35,000 and fair market value of $45,000).Dove Corporation issues 200 shares of stock,100 each to Sarah and Tony.Thus,each receives stock in Dove worth $50,000.

Juan exchanges property,basis of $200,000 and fair market value of $2.5 million,for 65% of the stock of Green Corporation.The other 35% is owned by Gloria who acquired it several years ago.What are the tax consequences to the parties involved?

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?

A shareholder contributes land to his wholly owned corporation but receives no stock in return.The corporation has a zero basis in the land.

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 be handled?

In order to retain the services of Eve,a key employee in Ted's sole proprietorship,Ted contracts with Eve to make her a 30% owner.Ted incorporates the business receiving in return 100% of the stock.Three days later,Ted transfers 30% of the stock to Eve.Under these circumstances,§ 351 will not apply to the incorporation of Ted's business.

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

In order to encourage the development of an industrial park,a county donates land to Ecru Corporation.The donation does not result in gross income to Ecru.

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

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

Tan Corporation desires to set up a manufacturing facility in the western part of the United States.After considerable negotiations with Butte,Montana,Tan accepts the following offer: land (fair market value of $4.5 million)and cash of $1.5 million.