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Exam 18: Corporations: Organization and Capital Structure

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Question 41

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In 2004,Donna transferred assets (basis of $300,000 and fair market value of $250,000)to Egret Corporation in return for 200 shares of § 1244 stock.Due to § 351,the transfer was nontaxable; therefore,Donna's basis in the Egret stock is $300,000.In 2005,Donna sells 100 of these shares to Walter (a family friend)for $100,000.In 2011,Egret Corporation files for bankruptcy,and its stock becomes worthless.

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Question 42

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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.

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Question 43

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In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville,Tennessee,the city donates land (fair market value of $400,000) and cash of $100,000 to the corporation.Several months after the donation,Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land.

Barry and Irv form Swift Corporation.Barry transfers cash of $100,000 and equipment (basis of $300,000 and fair market value of $400,000)for 50% of Swift's stock.Irv transfers land and building (basis of $510,000 and fair market value of $450,000)and agrees to manage the business for one year for the other 50% of Swift's stock.The value of Irv's services for one year is $50,000.

If both §§ 357(b)and (c)apply to the same transfer (i.e.,the liability is not supported by a bona fide business purpose and also exceeds the basis of the properties transferred),§ 357(c)predominates.

Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

Thomas transfers cash of $160,000 to Grouse Corporation,a newly formed corporation,for 100% of the stock in Grouse worth $90,000 and debt in the amount of $70,000,payable in equal annual installments of $7,000 plus interest at the rate of 5% per annum.In the first year of operation,Grouse has net taxable income of $40,000.If Grouse pays Thomas interest of $3,500 and $7,000 principal payment on the note:

Wade and Paul form Swan Corporation with the following investments.Wade transfers machinery (basis of $40,000 and fair market value of $100,000) ,while Paul transfers land (basis of $20,000 and fair market value of $90,000) and services rendered (worth $10,000) in organizing the corporation.Each is issued 25 shares in Swan Corporation.With respect to the transfers:

Tara incorporates her sole proprietorship,transferring it to newly formed Black Corporation.The assets transferred have an adjusted basis of $240,000 and a fair market value of $300,000.Also transferred was $10,000 in liabilities,$1,000 of which was personal and the balance of $9,000 being business related.In return for these transfers,Tara receives all of the stock in Black Corporation.

A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation.

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?

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

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.

How is the transfer of liabilities in a property transaction generally treated for tax purposes? How is a transfer of liabilities generally treated in a § 351 transaction? What exceptions could arise to this usual treatment in a § 351 setting?

Issues relating to basis arise when a taxpayer is involved in a § 351 transaction.Describe the underlying rules,and the purpose they serve.

Hunter and Warren form Tan Corporation.Hunter transfers equipment (basis of $210,000 and fair market value of $180,000) while Warren transfers land (basis of $15,000 and fair market value of $150,000) and $30,000 of cash.Each receives 50% of Tan's stock.As a result of these transfers:

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:

If a shareholder owns stock received as a gift from her mother,it cannot be § 1244 stock.

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later,Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark City.Ann,the sole shareholder,contributes equipment (basis of $70,000 and fair market value of $200,000)to help Orange in its new operations.What are the tax consequences of these transfers to Orange Corporation?

Julio exchanges property,basis of $100,000 and fair market value of $1.8 million,for 75% of the stock of Lime Corporation.The other 25% is owned by Gloria who acquired it several years ago.What are the tax consequences to the parties involved?