Question 1

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's realized gain is $10,000 ($200,000 FMV - $190,000 basis). She received 80% of the stock in Goldfinch Corporation, which has a fair market value of $180,000. Thus, the portion of the realized gain that is recognized is the lesser of the realized gain or the boot received, which is $10,000. Therefore, Eileen recognizes $10,000 of gain on the transfer.

Question 2

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

The answer of Gabriella and Juanita form Luster Corporation. Gabriella...

Question 3

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

Accepted Answer

The tax law is not neutral for the investor as to debt and equity financing. Different tax consequences apply depending on whether the investor receives interest income from debt or dividend income from equity.

Question 4

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351, the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

Accepted Answer

In a § 351 exchange, the transferor's basis in the stock received is decreased (not increased) by the amount of the liability (such as a mortgage) assumed by the corporation. This ensures that the transferor does not recognize a gain or loss on the transfer of the property to the corporation.

Question 5

In return for legal services worth $60,000 rendered incident to its formation, Crimson Corporation issues stock to Greta, an attorney. Crimson cannot immediately deduct the value of any of this stock but instead must capitalize it as an organizational expenditure.

Accepted Answer

The issuance of stock in exchange for legal services rendered in connection with the formation of a corporation is considered an organizational expenditure under US tax law. As such, it cannot be immediately deducted but must be capitalized and amortized over a period of time.

Question 6

To ease a liquidity problem, all of the shareholders of Osprey Corporation contribute additional cash to its capital. Osprey has no tax consequences from the contribution.

Accepted Answer

Shareholder contributions to a corporation's capital do not have tax consequences for the corporation.

Question 7

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

The answer of Jane transfers property (basis of $180,000 and...

Question 8

A city contributes $500,000 to a corporation as an inducement to locate in the city. Within the next 12 months, the corporation uses the money to purchase property. The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

Accepted Answer

The answer of A city contributes $500,000 to a corporation...

Question 9

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

The answer of Mitchell and Powell form Green Corporation. Mitchell...

Question 10

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.

Accepted Answer

The answer of If both §§ 357(b) and (c) apply...

Question 11

Ira, a calendar year taxpayer, purchases as an investment stock in Redbird Corporation on November 3, 2015. On February 2, 2016, 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 2016.

Accepted Answer

The answer of Ira, a calendar year taxpayer, purchases as...

Question 12

In general, the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer.

Accepted Answer

In a transfer that qualifies as a nontaxable exchange under § 351, the basis of the property to the corporation is generally the same as the basis in the hands of the transferor shareholder, increased by any gain recognized by the shareholder on the transfer.

Question 13

A shareholder contributes land to his wholly owned corporation but receives no stock in return. The corporation has a zero basis in the land.

Accepted Answer

When a shareholder contributes property (such as land) to a corporation in exchange for stock, the corporation's basis in the property is generally the same as the shareholder's adjusted basis, just before the contribution. This rule applies even if the shareholder owns 100% of the corporation.

Question 14

A shareholder transfers a capital asset to Red Corporation for its stock. If the transfer qualifies under § 351, Red's holding period for the asset begins on the day of the exchange.

Accepted Answer

Red Corporation's holding period for the capital asset includes the shareholder's holding period, provided the asset was a capital asset or a Section 1231 asset in the hands of the transferor.

Question 15

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

Accepted Answer

When depreciable property is transferred to a controlled corporation under § 351, any recapture potential (such as depreciation recapture under § 1245 or § 1250) carries over to the corporation. This means the corporation may have to recognize this recapture income upon a subsequent disposition of the property.

Question 16

Carl and Ben form Eagle Corporation. Carl transfers cash of $50,000 for 50 shares of stock of Eagle. Ben transfers proprietary information with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Eagle. Carl will have a tax basis of $50,000 in his stock in Eagle Corporation and Ben's basis in his stock will be zero.

Accepted Answer

Carl's tax basis in his stock is equal to the cash he transferred, while Ben's tax basis in his stock is equal to the fair market value of the proprietary information he transferred. Since his tax basis is zero, it means he will not have any taxable gain or loss from the transfer.

Question 17

In order to encourage the development of an industrial park, a county donates land to Ecru Corporation. The donation does not result in gross income to Ecru.

Accepted Answer

The donation of land does not result in gross income for Ecru Corporation.

Question 18

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

Accepted Answer

This statement is correct and is based on the formula for determining the basis of stock received in a § 351 transfer, which takes into account the appreciated property transferred, any boot (property that is not stock) received, and any gain recognized on the transfer. The formula is calculated as follows: Basis of stock received = (Basis of appreciated property transferred) - (Boot received) + (Gain recognized).

Question 19

Kim, a real estate dealer, and others form Eagle Corporation under § 351. Kim contributes inventory (land held for resale) in return for Eagle stock. The holding period for the stock includes the holding period of the inventory.

Accepted Answer

Under § 351, the holding period for the stock received does not include the holding period of the inventory (land held for resale) contributed to the corporation. The holding period for the stock begins when the stock is acquired, not from when the inventory was originally held by the contributor.

Question 20

A shareholder's holding period for stock received under § 351 can include the holding period of the property transferred to the corporation.

Accepted Answer

According to IRS regulations, a shareholder's holding period for stock received under § 351 can include the holding period of the property transferred to the corporation. This is known as the carryover basis rule.

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