Question 1

Seoyun and Nicole form Indigo Corporation with the following transfers: inventory from Seoyun (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo. The corporation's stock is distributed equally to Seoyun and Nicole. As a result of these transfers:

Accepted Answer

The answer of Seoyun and Nicole form Indigo Corporation with...

Question 2

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

Accepted Answer

§ 1244 stock must be originally issued to the shareholder in exchange for money or property. Since the stock was received as a gift, it cannot qualify as § 1244 stock.

Question 3

Mitchell and Powell form Green Corporation. Mitchell transfers property (basis of $105,000 and fair market value of $90,000) while Powell transfers land (basis of $8,000 and fair market value of $75,000) and $15,000 of cash. Each receives 50% of Green Corporation's stock (total value of $180,000). As a result of these transfers:

Accepted Answer

Mitchell and Powell each transfer property with a fair market value equal to their basis, so neither has a recognized gain or loss.

Question 4

A corporation's holding period for property received under § 351 includes the holding period of the transferor shareholder.

Accepted Answer

According to the Internal Revenue Code § 1223(1), a corporation's holding period for property received under § 351 includes the holding period of the transferor shareholder. This means that the corporation will inherit the same holding period as the shareholder who transferred the property in exchange for stock.

Question 5

One month after Sally incorporates her sole proprietorship, she gives 25% of the stock to her children. Section 351 cannot apply to Sally because she has not satisfied the 80% control requirement.

Accepted Answer

Section 351 can still apply to Sally even though she has given 25% of the stock to her children. The 80% control requirement refers to the transfer of property to a corporation by multiple shareholders, not to the transfer of stock within the same family. Sally is still the majority shareholder with 75% of the stock, so she can meet the control requirement for Section 351.

Question 6

Eileen transfers property worth $200,000 (basis of $190,000) 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:

Accepted Answer

Eileen recognizes a gain of $10,000, which is the lesser of the realized gain ($200,000 - $190,000 = $10,000) or the fair market value of the boot received ($20,000 note).

Question 7

A transferor who receives stock for both property and services may not be included in the control group in determining whether an exchange meets the requirements of § 351.

Accepted Answer

A transferor who receives stock for both property and services can still be included in the control group for determining whether an exchange meets the requirements of § 351, as long as the transfer of property (not services) meets the control requirements.

Question 8

A long-term note is treated as "boot." Thus, Eve is taxed on the value of the note received.

Accepted Answer

This is true according to the tax treatment of receiving property in a taxable transaction. The fair market value of the property received, including a long-term note, is treated as "boot," which is subject to taxation.

Question 9

Ann transferred land worth $200,000, with a tax basis of $40,000, to Brown Corporation, an existing entity, for 100 shares of its stock. Brown Corporation has two other shareholders, Bill and Bob, each of whom holds 100 shares. With respect to the transfer:

Accepted Answer

The answer of Ann transferred land worth $200,000, with a...

Question 10

Gabriella and Juanita form Luster Corporation. Gabriella transfers cash of $50,000 for 50 shares of stock, while Juanita transfers information concerning a proprietary process (basis of zero and fair market value of $50,000) for 50 shares of stock.

Accepted Answer

Under IRC Section 351, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation. Both Gabriella and Juanita meet these requirements, so neither recognizes gain.

Question 11

Alan, an Owl Corporation shareholder, makes a contribution to capital of equipment to Owl, basis of $40,000 and fair market value of $50,000. Owl's basis of the equipment that Alan contributes is equal to $50,000, the property's fair market value.

Accepted Answer

Owl's basis in the equipment that Alan contributes is equal to Alan's adjusted basis in the equipment at the time of the contribution, which is $40,000, not the fair market value of $50,000.

Question 12

Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000), executed by Green Corporation and made payable to Jane. As a result of the transfer:

Accepted Answer

Jane recognizes a gain to the extent of the boot received, which is the long-term note worth $75,000.

Question 13

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.

Accepted Answer

Ron receives stock for both property and services. His basis in the stock received for property is the same as his basis in the property transferred ($6,000), plus the fair market value of the stock received for services ($21,000), totaling $27,000.

Question 14

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

Accepted Answer

Not all debt in a thinly capitalized corporation is automatically reclassified as equity. The reclassification depends on the jurisdiction's tax laws and accounting principles, and typically only occurs under specific conditions where the debt is deemed to not have the characteristics of genuine debt.

Question 15

When a taxpayer incorporates her business, she transfers several liabilities to the corporation. If one of the liabilities is personal in origin, the release of only that liability is treated as boot.

Accepted Answer

The answer of When a taxpayer incorporates her business, she...

Question 16

Amy owns 20% of the stock of Wren Corporation, which she acquired several years ago at a cost of $10,000. Amy is Vice-President of Wren and earns a salary of $80,000 annually. Last year, Wren Corporation was experiencing financial problems, and Amy loaned the corporation $25,000. In the current year, Wren becomes bankrupt, and both her stock investment and the loan become worthless. Amy has a nonbusiness bad debt deduction this year of $25,000.

Accepted Answer

Amy's loan to Wren Corporation is considered a business bad debt because she is an employee and officer of the corporation, and the loan was related to her business activities. Business bad debts are deductible as ordinary losses, not as nonbusiness bad debts.

Question 17

A shareholder lends money to his corporation in his capacity as an investor. If the loans become worthless, a business bad debt results.

Accepted Answer

When a shareholder lends money to their corporation, any loss from the loan becoming worthless is typically treated as a nonbusiness bad debt if the lending was done in the capacity of an investor. Business bad debts are generally those incurred in the ordinary course of a trade or business.

Question 18

Ira, a calendar year taxpayer, purchases as an investment stock in Redbird Corporation on November 3, 2017. On February 2, 2018, Redbird Corporation is declared bankrupt, and Ira's stock becomes worthless. Presuming § 1244 (stock in a small business corporation) does not apply, Ira has a short-term capital loss for 2018.

Accepted Answer

Ira has a long-term capital loss for 2018 because the stock was held for more than one year before it became worthless.

Question 19

Under Federal tax law, a bias exists in favor of debt, as compared to equity, when financing the operations of a corporation.

Accepted Answer

This is because interest on debt is tax-deductible, while dividends paid on equity are not deductible. This bias results in corporations having a greater incentive to finance their operations through debt rather than equity.

Question 20

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

Silver Corporation's basis in the expansion is $1.5 million because the basis of property is generally its cost, and inducement payments received do not reduce the basis of the property acquired or constructed.

Quiz 18: Corporations: Organization and Capital Structure