Question 1

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

Accepted Answer

A)  Recognized loss of $60,000. 
B)  Recognized loss of $20,000. 
C)  Basis of $460,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000). 
D)  Basis of $400,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000). 
E)  None of the above.

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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 5

Rachel owns 100% of the stock of Cardinal Corporation. In the current year Rachel transfers an installment obligation, tax basis of $180,000 and fair market value of $350,000, for additional stock in Cardinal worth $350,000.

Accepted Answer

A)  Rachel has a taxable gain of $180,000. 
B)  Rachel has a taxable gain of $170,000. 
C)  Rachel recognizes no gain on the transfer. 
D)  Rachel has a basis of $350,000 in the additional stock she received in Cardinal Corporation. 
E)  None of the above.

Question 6

Carl and Ben form Eagle Corporation. Carl transfers cash of $50,000 for 50 shares of stock of Eagle. Ben transfers proprietary information with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Eagle. Carl will have a tax basis of $50,000 in his stock in Eagle Corporation and Ben's basis in his stock will be zero.

Accepted Answer

A) True 
 B)False

Question 7

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 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

George transfers cash of $150,000 to Finch Corporation, a newly formed corporation, for 100% of the stock in Finch 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, Finch has net taxable income of $40,000. If Finch pays George interest of $6,300 and $7,000 principal payment on the note:

Accepted Answer

A)  George has dividend income of $13,300. 
B)  Finch Corporation does not have a tax deduction with respect to the payment. 
C)  George has dividend income of $7,000. 
D)  Finch Corporation has an interest expense deduction of $6,300. 
E)  None of the above.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Four individuals form Chickadee Corporation under § 351. Two of these individuals, Jane and Walt, made the following contributions: 
Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

Accepted Answer

A)  Jane must recognize income of $40,000? Walt has no income. 
B)  Neither Jane nor Walt recognize income. 
C)  Walt must recognize income of $130,000? Jane has no income. 
D)  Walt must recognize income of $100,000? Jane has no income. 
E)  None of the above.

Question 12

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)  Orange Corporation's basis in the building is $120,000. 
B)  Dick has no recognized gain. 
C)  Dick has a recognized gain of $5,000. 
D)  Dick has a recognized gain of $10,000. 
E)  None of the above.

Question 14

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 compensation deduction of $10,000. 
D)  Gull capitalizes $10,000 as organizational costs. 
E)  None of the above.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Trish and Ron form Pine Corporation. Trish transfers inventory (basis of $60,000 and fair market value of $110,000) for 50% of the stock in Pine. Ron transfers machinery (basis of $20,000 and fair market value of $60,000) and agrees to serve as manager of Pine Corporation for one year for 50% of the stock. What are the tax consequences to Trish, Ron, and Pine Corporation?

Accepted Answer

The answer of Trish and Ron form Pine Corporation. Trish...

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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:

Accepted Answer

A)  Erica does not recognize gain. 
B)  Erica recognizes gain of $400,000. 
C)  Robin Corporation has a basis of $100,000 in the land. 
D)  Robin Corporation has a basis of $300,000 in the land. 
E)  None of the above.

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

When incorporating her sole proprietorship, Samantha transfers all of its assets and liabilities. Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure. Under these circumstances, the entire $30,000 will be treated as boot.

Accepted Answer

A) True 
 B)False

Exam 18: Corporations: Organization and Capital Structure

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

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.

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:

Rachel owns 100% of the stock of Cardinal Corporation. In the current year Rachel transfers an installment obligation, tax basis of $180,000 and fair market value of $350,000, for additional stock in Cardinal worth $350,000.

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) .

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

Four individuals form Chickadee Corporation under § 351. Two of these individuals, Jane and Walt, made the following contributions: Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

For § 351 purposes, stock rights and stock warrants are included in the definition of "stock."

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

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

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.

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:

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.

When incorporating her sole proprietorship, Samantha transfers all of its assets and liabilities. Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure. Under these circumstances, the entire $30,000 will be treated as boot.