Exam 18: Corporations: Organization and Capital Structure

Three individuals form Skylark Corporation with the following contributions: Cliff,cash of $50,000 for 50 shares;Brad,land (fair market value of $20,000)for 20 shares;and Ron,cattle (fair market value of $9,000)for 9 shares and services (fair market value of $21,000)for 21 shares.Section 351 will not apply in this situation because the control requirement has not been satisfied.

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

Ira,a calendar year taxpayer,purchases as an investment stock in Redbird Corporation on November 2,2009.On February 1,2010,Redbird Corporation is declared bankrupt,and Ira's stock becomes worthless.Presuming § 1244 (stock in a small business corporation)does not apply,Ira has a short-term capital loss for 2010.

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?

Rob and Sharon form Swallow Corporation with the following consideration: Each receives 50% of Swallow's stock.In addition,Sharon receives cash of $40,000.One result of these transfers is that Sharon has a:

Albert transfers land (basis of $140,000 and fair market value of $320,000)to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000.Gold assumes Albert's mortgage on the land of $200,000.

Basis of appreciated property transferred minus boot received (including liabilities transferred)plus gain recognized equals basis of stock received in a § 351 transfer.

Eileen transfers property worth $200,000 (basis of $60,000)to Goldfinch Corporation.In return,she receives 80% of the stock in Goldfinch Corporation (fair market value of $180,000)and a long-term note,executed by Goldfinch and made payable to Eileen (fair market value of $20,000).Eileen recognizes no gain on the transfer.

Silver Corporation receives $1 million in cash from Madison County as an inducement to expand its operations.Within one year,Silver spends $1.5 million to enlarge its existing plant.Silver Corporation's basis in the expansion is $500,000.

One month after Sally incorporates her sole proprietorship,she gives 25% of the stock to her children.Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement.

Kim owns 100% of the stock of Cardinal Corporation.In the current year Kim transfers an installment obligation,tax basis of $30,000 and fair market value of $200,000,for additional stock in Cardinal worth $200,000.

Lynn transfers property (basis of $225,000 and fair market value of $300,000)to Falcon Corporation in exchange for § 1244 stock.The transfer qualifies as a nontaxable exchange under § 351.In the current year,Lynn sells the Falcon stock for $100,000.Assume Lynn files a joint return with her husband,Ricky.With respect to the sale,Lynn has:

A shareholder transfers a capital asset to Red Corporation for its stock.If the transfer qualifies under § 351,Red's holding period for the asset begins on the day of the exchange.

Kirby and Helen form Red Corporation.Kirby transfers property,basis of $20,000 and value of $300,000,for 100 shares in Red Corporation.Helen transfers property,basis of $40,000 and value of $280,000,and provides legal services in organizing the corporation.The value of her services is $20,000.In return Helen receives 100 shares in Red Corporation.With respect to the transfers:

If a corporation is thinly capitalized,all debt is reclassified as equity.

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:

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

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

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:

Trudy forms Oak Corporation by transferring land with a basis of $150,000 (fair market value of $800,000),subject to a mortgage of $450,000.Two weeks prior to incorporating Oak,Trudy borrows $10,000 for personal purposes and gives the lender a second mortgage on the land.Oak Corporation issues stock worth $340,000 to Trudy and assumes the two mortgages on the land.What are the tax consequences to Trudy and to Oak Corporation?