Exam 18: Corporations: Organization and Capital Structure

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000? land by Tony (basis of $25,000 and fair market value of $35,000). Dove Corporation issues 400 shares of stock, 200 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000.

In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville, Tennessee, the city donates land (fair market value of $400,000) and cash of $100,000 to the corporation. Several months after the donation, Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land.

When Pheasant Corporation was formed under § 351, Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock. Kristen's basis in the Pheasant stock is $26,000. Three years later, Pheasant Corporation goes bankrupt and its stock becomes worthless. Kristen, who is single, owned the stock as an investment. Kristen's loss is:

Eileen transfers property worth $200,000 (basis of $190,000) 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 (fair market value of $20,000) executed by Goldfinch and made payable to Eileen. Eileen recognizes gain on the transfer of:

Ira, a calendar year taxpayer, purchases as an investment stock in Redbird Corporation on November 3, 2017. On February 2, 2018, 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 2018.

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?

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

Rhonda and Marta form Blue Corporation. Rhonda transfers land (basis of $55,000 and fair market value of $180,000) for 50 shares plus $20,000 cash. Marta transfers $160,000 cash for 50 shares in Blue Corporation.

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city. Ann, the sole shareholder, contributes equipment (basis of $70,000 and fair market value of $200,000) to help Orange in its new operations. What are the tax consequences of these transfers to Orange Corporation?

Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of $50,000, while Maria transfers a proprietary formula (basis of $0? fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.

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. a. How much income, if any, must Tan recognize? b. What basis will Tan Corporation have in the land? c. Within one year of the contribution, Tan purchases equipment for $1.6 million. What basis will Tan have in the equipment?

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

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

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

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.

In return for legal services worth $60,000 rendered incident to its formation, Crimson Corporation issues stock to Greta, an attorney. Crimson cannot immediately deduct the value of any of this stock but instead must capitalize it as an organizational expenditure.

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000.

In structuring the capitalization of a corporation, the tax law is neutral for the investor as to debt versus equity financing.

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

Similar to the like-kind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.