Exam 18: Corporations: Organization and Capital Structure

George transfers cash of $150,000 to Grouse Corporation,a newly formed corporation,for 100% of the stock in Grouse worth $80,000 and debt in the amount of $70,000,payable in equal annual installments of $7,000 plus interest at the rate of 9% per annum.In the first year of operation,Grouse has net taxable income of $40,000.If Grouse pays George interest of $6,300 and $7,000 principal payment on the note:

Dawn,a sole proprietor,was engaged in a service business and reported her income on a cash basis.Later,she incorporates her business and transfers the assets of the business to the corporation in return for all the stock in the corporation plus the corporation's assumption of the liabilities of her proprietorship.All the receivables and the unpaid trade payables are transferred to the newly formed corporation.The assets of the proprietorship had a basis of $105,000 and fair market value of $300,000.The trade accounts payable totaled $25,000.There was a note payable to the bank in the amount of $95,000 that the corporation assumes.The note was issued for the purchase of computers and other business equipment.

Ashley,a 70% shareholder of Wren Corporation,transfers property with a basis of $250,000 and a fair market value of $900,000 to Wren Corporation for additional stock.Ashley owns 78% of Wren after the transfer.Two other shareholders in Wren transfer a nominal amount of property to Wren along with Ashley's transfer so that Ashley and the two shareholders own 90% of the Wren stock after the transfer.Does Ashley have taxable gain on the transfer?

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

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:

Carl and Ben form Condor Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Condor.Ben transfers a secret process with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Condor.Both Carl and Ben will have a tax basis of $50,000 in their stock in Condor Corporation.

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.

In a § 351 transaction,if a transferor receives consideration other than stock,the transaction can be taxable.

Hunter and Warren form Tan Corporation.Hunter transfers equipment (basis of $210,000 and fair market value of $180,000)while Warren transfers land (basis of $15,000 and fair market value of $150,000)and $30,000 of cash.Each receives 50% of Tan's stock.As a result of these transfers:

Adam transfers inventory 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 $30,000.Adam recognizes a capital gain of $30,000 on the transfer.

In general,the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer.

In a § 351 transfer,a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000.Only $7,000 of the boot will be taxed to the shareholder.

In order to induce Parakeet Corporation to build a new manufacturing facility in Oxford,Mississippi,the city donates land (fair market value of $250,000)and cash of $50,000 to the corporation.Within several months of the donation,Parakeet Corporation spends $350,000 (which includes the $50,000 received from Oxford)on the construction of a new plant located on the donated land.