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Exam 4: Corporations Organization and Capital Structure

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Question 41

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

A) True
B) False

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Question 42

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When depreciable property is transferred to a controlled corporation under § 351, any recapture potential disappears and does not carry over to the corporation.

A) True
B) False

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Question 43

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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:

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

Four years ago, Don, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244, at a cost of $60,000. Don wants to give his son, Ron, $20,000 to help finance Ron's college education. The stock is currently worth $20,000. Don is considering selling the stock in the current year for $20,000 and giving the cash to Ron. As an alternative, Don could give the stock to Ron and let Ron sell it for $20,000. Which alternative should Don choose?

Four individuals form Chickadee Corporation under § 351. Two of these individuals, Jane and Walt, made the following contributions: $\begin{array}{lrr}&&\text { Fair Market }\\&\text { Adjusted Basis }&\text {Value }\\\text { From Jane- } & \\\text { Cash } & \$ 360,000 & \$ 360,000\\\text { Patent } &-0- & 40,000 \\\text { From Walt- } & & \\\text { Equipment (depreciation claimed of } \$ 100,000) & 240,000 & 370,000\end{array}$ Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

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.

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.

Art, an unmarried individual, transfers property (basis of $130,000 and fair market value of $120,000) to Condor Corporation in exchange for §1244 stock. The transfer qualifies as a nontaxable exchange under § 351. Because the property is loss property, Condor takes a basis in the property of $120,000. Five years later, Art sells the Condor stock for $50,000. With respect to the sale, Art has:

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.

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.

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:

Rob and Fran form Bluebird Corporation with the following investments. $\begin{array}{lll}&&\text { Fair Market }\\&\text { Adjusted Basis }&\text {Value }\\\text { From Rob- } & & \\\text { Cash } & \$ 400,000 & \$ 400,000 \\\text { From Fran- } & & \\\text { Land } & 500,000 & 440,000\end{array}$ ? Each receives 50% of Bluebird's stock. In addition, Fran receives cash of $40,000. One result of these transfers is that Fran has a:

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.

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:

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:

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:

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?

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

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.