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Exam 12: Corporations: Organization, Capital Structure, and Operating Rules

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Question 71

Multiple Choice

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In the current year, Red Corporation a calendar year C corporation) , which owns stock in Blue Corporation, had net operating income of $200,000 for the year.Blue pays Red a dividend of $40,000.Red takes a dividends received deduction of $20,000.Which of the following statements is correct?

A) Red owns 80% of Blue Corporation.
B) Red owns 20% or more, but less than 80% of Blue Corporation.
C) Red owns 80% or more of Blue Corporation.
D) Red owns less than 20% of Blue Corporation.
E) None of the above.

F) C) and D)
G) A) and D)

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Question 72

Multiple Choice

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Leah transfers equipment basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation.After the transfer, Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

A) Leah recognizes ordinary income of $70,000.
B) The § 1245 depreciation recapture potential carries over to Crow Corporation.
C) The § 1245 depreciation recapture potential disappears.
D) Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000.
E) None of the above.

F) C) and E)
G) None of the above

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Question 73

True/False

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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.

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.

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

Carl transfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000.The land, which has a basis to Carl of $70,000, is worth $160,000.

Albert transfers land basis of $140,000 and fair market value of $320,000) to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000.Gold assumes Albert's mortgage on the land of $200,000.

Juanita owns 60% of the stock in a C corporation that had a profit of $200,000 in the current year.Carlos owns a 60% interest in a partnership that had a profit of $200,000 during the year.The corporation distributed $45,000 to Juanita, and the partnership distributed $45,000 to Carlos.With respect to this information, which of the following statements is incorrect?