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Exam 4: Corporations: Organization and Capital Structure

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Question 1

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Carl and Ben form Condor Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Condor.Ben transfers a secret process with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Condor.Both Carl and Ben will have a tax basis of $50,000 in their stock in Condor Corporation.

A) True
B) False

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Question 2

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

A) True
B) False

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Question 3

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

If a corporation is thinly capitalized,all debt is reclassified as equity.

Sarah and Emily form Red Corporation with the following investments: Sarah transfers computers worth $200,000 (basis of $80,000) ,while Emily transfers real estate worth $180,000 (basis of $40,000) and services (worth $20,000) rendered in organizing the corporation.Each is issued 600 shares in Red Corporation.With respect to the transfers:

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

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 be handled?

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 determining whether § 357(c)applies,assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

For transfers falling under § 351,what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?

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 definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.

Hazel transferred the following assets to Starling Corporation. In exchange,Hazel received 50% of Starling Corporation's only class of stock outstanding.The stock has no established value.However,all parties sincerely believe that the value of the stock Hazel received is the equivalent of the value of the assets she transferred.The only other shareholder,Rick,formed Starling Corporation five years ago.

Stock in Merlin Corporation is held equally by Jane,Eve,and Fred.Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000.Jane,Eve,and Fred propose to loan Merlin $2,000,000 each,taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate.Merlin Corporation has current taxable income of $7,000,000.How are the payments on the notes treated for tax purposes?

Eileen transfers property worth $200,000 (basis of $60,000) 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:

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?

The bona fide business requirement of § 357(b)is easily satisfied as long as the liability arose in the normal course of conducting the business that is incorporated.

In order to induce Parakeet Corporation to build a new manufacturing facility in Oxford,Mississippi,the city donates land (fair market value of $250,000) and cash of $50,000 to the corporation.Within several months of the donation,Parakeet Corporation spends $350,000 (which includes the $50,000 received from Oxford) on the construction of a new plant located on the donated land.

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

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