Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

Carmen and Carlos form White Corporation.Carmen transfers cash of $100,000 for 100 shares in White.Carlos transfers property (basis of $20,000 and fair market value of $80,000)and agrees to serve as manager of White Corporation for one year;in return,Carlos receives 100 shares in White.The value of Carlos's services is $20,000.White Corporation can deduct $20,000 as compensation expense for the value of the services Carlos will render.

Accepted Answer

A) True 
 B)False

Question 3

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:

Accepted Answer

A) Eve recognizes no gain. 
B) Eve recognizes a gain of $230,000. 
C) Eve recognizes a gain of $280,000. 
D) Eve recognizes a gain of $50,000. 
E) None of the above.

Question 4

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:

Accepted Answer

A) Gull Corporation has a basis of $240,000 in the property transferred by Kay. 
B) Neither Joe nor Kay recognizes gain or income on the exchanges. 
C) Gull Corporation has a business deduction under § 162 of $10,000. 
D) Gull capitalizes $10,000 as organizational costs. 
E) None of the above.

Question 5

Allen transfers marketable securities 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 $40,000.Allen recognizes a capital gain of $40,000 on the transfer.

Accepted Answer

A) True 
 B)False

Question 6

In a § 351 transaction,Gerald transfers equipment worth $85,000 (basis of $120,000)in exchange for all of the Rust Corporation stock.Gerald's stock basis is $120,000 and Rust's basis in the equipment is $120,000.

Accepted Answer

A) True 
 B)False

Question 7

Three individuals form Skylark Corporation with the following contributions: Cliff,cash of $50,000 for 50 shares;Brad,land worth $20,000 (basis of $11,000)for 20 shares;and Ron,cattle worth $9,000 (basis of $6,000)for 9 shares and services worth $21,000 for 21 shares.

Accepted Answer

A) These transfers are fully taxable and not subject to § 351. 
B) Ron's basis in his stock is $27,000. 
C) Ron's basis in his stock is $6,000. 
D) Brad's basis in his stock is $20,000. 
E) None of the above.

Question 8

Rita forms Finch Corporation by transferring land (basis of $125,000;fair market value of $750,000)which is subject to a mortgage of $375,000.Two weeks prior to incorporating Finch,Rita borrows $125,000 for personal purposes and gives the lender a second mortgage on the land.Finch Corporation issues stock worth $250,000 to Rita and assumes the two mortgages on the land.What are the tax consequences to Rita and to Finch Corporation?

Accepted Answer

The answer of Rita forms Finch Corporation by transferring land...

Question 9

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:

Accepted Answer

A) Mary will not recognize gain or income. 
B) Earl will recognize a gain of $1,400,000. 
C) Crow Corporation has a basis of $1,480,000 in the property it received from Mary. 
D) Crow will have a business deduction of $120,000 for the value of the services Mary will render. 
E) None of the above.

Question 10

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 transaction have been handled?

Accepted Answer

The answer of Penny,Miesha,and Sabrina transfer property to Owl Corporation...

Question 11

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351,the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

Accepted Answer

A) True 
 B)False

Question 12

Leonard transfers equipment (basis of $40,000 and fair market value of $100,000)for additional stock in Green Corporation.After the transfer,Leonard owns 90% of the stock.Leonard had claimed depreciation of $50,000 on the equipment prior to transferring it to Green Corporation.With respect to the transfer:

Accepted Answer

A) Leonard has ordinary income of $50,000. 
B) Leonard has ordinary income of $50,000 and a § 1231 gain of $10,000. 
C) Green Corporation has ordinary income of $50,000. 
D) Green Corporation has a basis of $40,000 in the equipment and it will have no depreciation recapture if it later disposes of the equipment in a taxable transaction. 
E) None of the above.

Question 13

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:

Accepted Answer

A) Indigo can deduct $25,000 as a business expense. 
B) Nicole has a recognized gain of $55,000 on the transfer of the real estate. 
C) Indigo has a basis of $360,000 in the inventory. 
D) Indigo has a basis of $375,000 in the real estate. 
E) None of the above.

Question 14

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation,Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

Accepted Answer

A) Adam has taxable income of $50,000. 
B) Camel Corporation has a tax deduction of $50,000. 
C) Adam has no taxable income from the distribution. 
D) Camel Corporation reduces its basis in the land to $150,000. 
E) None of the above.

Question 15

The use of § 351 is not limited to the initial formation of a corporation,and it can apply to later transfers as well.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

The answer of What is the rationale underlying the tax...

Question 17

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?

Accepted Answer

The answer of Perry organized Cardinal Corporation 10 years ago...

Question 18

Rick transferred the following assets and liabilities to Warbler Corporation.  In return,Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000).

Accepted Answer

A) Rick has a recognized gain of $60,000. 
B) Rick has a recognized gain of $75,000. 
C) Rick's basis in the stock of Warbler Corporation is $270,000. 
D) Warbler Corporation has the same basis in the assets received as Rick does in the stock. 
E) None of the above.

Question 19

Nancy,Guy,and Rod form Goldfinch Corporation with the following consideration.

Accepted Answer

The answer of Nancy,Guy,and Rod form Goldfinch Corporation with the...

Question 20

A transferor who receives stock for both property and services cannot be included in the control group in determining whether an exchange meets the requirements of § 351.

Accepted Answer

A) True 
 B)False

Exam 4: Corporations: Organization and Capital Structure

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.

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:

Allen transfers marketable securities 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 $40,000.Allen recognizes a capital gain of $40,000 on the transfer.

In a § 351 transaction,Gerald transfers equipment worth $85,000 (basis of $120,000)in exchange for all of the Rust Corporation stock.Gerald's stock basis is $120,000 and Rust's basis in the equipment is $120,000.

Three individuals form Skylark Corporation with the following contributions: Cliff,cash of $50,000 for 50 shares;Brad,land worth $20,000 (basis of $11,000) for 20 shares;and Ron,cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

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 transaction have been handled?

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351,the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation,Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

The use of § 351 is not limited to the initial formation of a corporation,and it can apply to later transfers as well.

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

Rick transferred the following assets and liabilities to Warbler Corporation. In return,Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000) .

Nancy,Guy,and Rod form Goldfinch Corporation with the following consideration.

A transferor who receives stock for both property and services cannot be included in the control group in determining whether an exchange meets the requirements of § 351.