Deck 4: Corporations: Organization and Capital Structure

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

In a § 351 transfer, the receipt of boot is not taxed if the shareholder has a realized loss.

Answer 3

True

Question 4

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.

Question 5

Jill transfers property worth $200,000 (basis of $190,000) to Blue Corporation. In return, she receives 80% of the stock in Blue Corporation (fair market value of $180,000) and a long-term note, executed by Blue and made payable to Jill (fair market value of $20,000). Jill recognizes gain of $20,000 on the transfer.

Question 6

Since services are not considered property under § 351, a taxpayer must report as income the fair market value of stock received for such services.

Question 7

In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder.

Question 8

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

Question 9

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.

Question 10

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

Question 11

Similar to like-kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.

Question 12

In order to retain the services of Bonnie, a key employee in Ralph's sole proprietorship, Ralph contracts with Bonnie to make her a 25% owner. Ralph incorporates the business receiving in return 100% of the stock. Three days later, Ralph transfers 25% of the stock to Bonnie. Under these circumstances, § 351 will not apply to the incorporation of Ralph's business.

Question 13

The receipt of nonqualified preferred stock in exchange for the transfer of appreciated property to a controlled corporation results in recognition of gain to the transferor.

Question 14

The receipt of securities (i.e., long-term debt) in exchange for the transfer of appreciated property to a controlled corporation results in recognition of realized gain to the transferor.

Question 15

In a § 351 transaction, if a transferor receives consideration other than stock, the transaction can be taxable.

Question 16

In a § 351 transfer, gain will be recognized to the extent of the lesser of realized gain or the boot received.

Question 17

Section 351 (which permits transfers to controlled corporations to be tax deferred) can be justified under the wherewithal to pay concept.

Question 18

Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land (fair market value of $20,000) for 20 shares; and Ron, cattle (fair market value of $9,000) for 9 shares and services (fair market value of $21,000) for 21 shares. Section 351 will not apply in this situation because the control requirement has not been satisfied.

Question 19

A secret process and patentable invention both constitute "property" for purposes of § 351.

Question 20

Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000.

Question 21

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.

Question 22

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.

Question 23

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

Question 24

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.

Question 25

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.

Question 26

When incorporating her sole proprietorship, Samantha transfers all of its assets and liabilities. Included in the $30,000 of liabilities assumed by the corporation is $500 that relates to a personal expenditure. Under these circumstances, the entire $30,000 will be treated as boot.

Question 27

Isabella and Marta form Pine Corporation. Isabella transfers land (basis of $40,000 and fair market value of $180,000) for 50 shares plus $20,000 cash, while Marta transfers $160,000 cash for the other 50 shares in Pine Corporation. Pine Corporation has a basis of $40,000 in the land it receives from Isabella.

Question 28

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.

Question 29

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

Question 30

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.

Question 31

Carl and Ben form Eagle Corporation. Carl transfers cash of $50,000 for 50 shares of stock of Eagle. 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 Eagle. Carl will have a tax basis of $50,000 in his stock in Eagle Corporation, but Ben's basis in his stock will be zero.

Question 32

In a § 351 transaction, Gerald transfers equipment worth $85,000 (basis of $120,000) in exchange for all of the Rust Corporation stock. Gerald's stock basis is $120,000 and Rust's basis in the equipment is $120,000.

Question 33

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

Question 34

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 recognize gain to avoid having a negative basis in the stock.

Question 35

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

Question 36

Rosa, the sole shareholder of Robin Corporation, contributes land (basis of $40,000 and fair market value of $100,000) to the corporation but does not receive additional stock. Neither Rosa nor Robin Corporation will have to recognize gain as a result of this transfer.

Question 37

To help avoid the thin capitalization problem, it is advisable to make the repayment of the debt contingent upon the corporation's earnings.

Question 38

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.

Question 39

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.

Question 40

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

Question 41

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.

Question 42

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:

A) Ann has no recognized gain.
B) Brown Corporation has a basis of $160,000 in the land.
C) Ann has a basis of $200,000 in her 100 shares in Brown Corporation.
D) Ann has a basis of $40,000 in her 100 shares in Brown Corporation.
E) None of the above.

Question 43

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:

A) Hunter has a recognized loss of $30,000; Warren has a recognized gain of $135,000.
B) Neither Hunter nor Warren has any recognized gain or loss.
C) Hunter has no recognized loss; Warren has a recognized gain of $30,000.
D) Tan Corporation has a basis in the land of $45,000.
E) None of the above.

Question 44

Rick transferred the following assets and liabilities to Warbler Corporation. In return, Rick received $75,000 in cash plus 90% of Warbler Corporation's only class of stock outstanding (fair market value of $225,000).

A) Rick has a recognized gain of $60,000.
B) Rick has a recognized gain of $75,000.
C) Rick's basis in the stock of Warbler Corporation is $270,000.
D) Warbler Corporation has the same basis in the assets received as Rick does in the stock.
E) None of the above.

Question 45

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

A) Wren Corporation's basis in the building is $110,000.
B) Tim has no recognized gain.
C) Tim has a recognized gain of $25,000.
D) Tim has a recognized gain of $5,000.
E) None of the above.

Question 46

Ann, Irene, and Bob incorporate their respective businesses and form Dove Corporation. Ann exchanges her property (basis of $100,000 and fair market value of $400,000) for 200 shares in Dove Corporation on March 1, 2009. Irene exchanges her property (basis of $140,000 and fair market value of $600,000) for 300 shares in Dove Corporation on April 11, 2009. Bob transfers his property (basis of $250,000 and fair market value of $1,000,000) for 500 shares in Dove Corporation on May 15, 2011. Bob's transfer is not part of a prearranged plan with Ann and Irene to incorporate their businesses. What gain, if any, will Bob recognize on the transfer?

A) $1,000,000.
B) $750,000.
C) $250,000.
D) $0.
E) None of the above.

Question 47

Kim owns 100% of the stock of Cardinal Corporation. In the current year Kim transfers an installment obligation, tax basis of $30,000 and fair market value of $200,000, for additional stock in Cardinal worth $200,000.

A) Kim recognizes no taxable gain on the transfer.
B) Kim has a taxable gain of $170,000.
C) Kim has a taxable gain of $180,000.
D) Kim has a basis of $200,000 in the additional stock she received in Cardinal Corporation.
E) None of the above.

Question 48

Mary transfers a building (adjusted basis of $15,000 and fair market value of $90,000) to White Corporation. In return, Mary receives 80% of White Corporation's stock (worth $65,000) and an automobile (fair market value of $5,000). In addition, there is an outstanding mortgage of $20,000 (taken out 15 years ago) on the building, which White Corporation assumes. With respect to this transaction:

A) Mary's recognized gain is $10,000.
B) Mary's recognized gain is $5,000.
C) Mary has no recognized gain.
D) White Corporation's basis in the building is $15,000.
E) None of the above.

Question 49

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) Sarah has no recognized gain; Emily recognizes income/gain of $160,000.
B) Neither Sarah nor Emily recognizes gain or income.
C) Red Corporation has a basis of $60,000 in the real estate.
D) Emily has a basis of $60,000 in the shares of Red Corporation.
E) None of the above.

Question 50

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:

A) Wade has no recognized gain; Paul recognizes income/gain of $80,000.
B) Neither Wade nor Paul has recognized gain or income on the transfers.
C) Swan Corporation has a basis of $30,000 in the land transferred by Paul.
D) Paul has a basis of $30,000 in the 25 shares he acquires in Swan Corporation.
E) None of the above.

Question 51

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

Question 52

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

A) Tom has no recognized gain; George recognizes gain/income of $80,000.
B) Neither Tom nor George recognizes gain or income.
C) Swan Corporation has a basis of $30,000 in the land.
D) George has a basis of $30,000 in the shares of Swan Corporation.
E) None of the above.

Question 53

Jane and Walt form Orange Corporation. Jane transfers equipment worth $475,000 (basis of $100,000) and cash of $25,000 to Orange Corporation for 50% of its stock. Walt transfers a building and land worth $525,000 (basis of $200,000) for 50% of Orange's stock and $25,000 cash.

A) Jane recognizes a gain of $375,000; Walt recognizes a gain of $325,000.
B) Jane recognizes a gain of $25,000; Walt recognizes no gain.
C) Neither Jane nor Walt recognizes gain.
D) Jane recognizes no gain; Walt recognizes a gain of $25,000.
E) None of the above.

Question 54

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

Question 55

Kathleen transferred the following assets to Mockingbird Corporation. In exchange, Kathleen received 40% of Mockingbird Corporation's only class of stock outstanding. The stock has no established value. However, all parties sincerely believe that the value of the stock Kathleen received is the equivalent of the value of the assets she transferred. The only other shareholder, Rick, formed Mockingbird Corporation five years ago.

A) Kathleen has no gain or loss on the transfer.
B) Mockingbird Corporation has a basis of $48,000 in the equipment and $108,000 in the land.
C) Kathleen has a basis of $256,000 in the stock of Mockingbird Corporation.
D) Mockingbird Corporation has a basis of $36,000 in the equipment and $144,000 in the land.
E) None of the above.

Question 56

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $55,000; land by Tony (basis of $35,000 and fair market value of $45,000). Dove Corporation issues 200 shares of stock, 100 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000.

A) Section 351 cannot apply since Sarah should have received 110 shares instead of only 100.
B) As a result of the transfer, Tony recognizes a gain of $10,000.
C) Tony's basis in the stock of Dove Corporation is $50,000.
D) Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.
E) None of the above.

Question 57

Kevin and Nicole form Indigo Corporation with the following transfers: inventory from Kevin (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 Kevin and Nicole. As a result of these transfers:

A) Indigo can deduct $25,000 as a business expense.
B) Nicole has a recognized gain of $55,000 on the transfer of the real estate.
C) Indigo has a basis of $360,000 in the inventory.
D) Indigo has a basis of $375,000 in the real estate.
E) None of the above.

Question 58

Erica transfers land worth $500,000, basis of $100,000, to a newly formed corporation, Robin Corporation, for all of Robin's stock, worth $300,000, and a 10-year note. The note was executed by Robin and made payable to Erica in the amount of $200,000. As a result of the transfer:

A) Erica does not recognize gain.
B) Erica recognizes gain of $400,000.
C) Robin Corporation has a basis of $100,000 in the land.
D) Robin Corporation has a basis of $300,000 in the land.
E) None of the above.

Question 59

Eve transfers property (basis of $120,000 and fair market value of $400,000) to Green Corporation for 80% of its stock (worth $350,000) and a long-term note (worth $50,000), executed by Green Corporation and made payable to Eve. As a result of the transfer:

A) Eve recognizes no gain.
B) Eve recognizes a gain of $230,000.
C) Eve recognizes a gain of $280,000.
D) Eve recognizes a gain of $50,000.
E) None of the above.

Question 60

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) Black Corporation has a basis of $241,000 in the property.
B) Black Corporation has a basis of $240,000 in the property.
C) Tara's basis in the Black Corporation stock is $241,000.
D) Tara's basis in the Black Corporation stock is $249,000.
E) None of the above.

Question 61

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.

A) Yellow recognizes income of $100,000 as to the donation.
B) Yellow has a zero basis in the land and a basis of $450,000 in the plant.
C) Yellow recognizes income of $500,000 as to the donation.
D) Yellow has a zero basis in the land and a basis of $350,000 in the plant.
E) None of the above.

Question 62

Ashley, a 70% shareholder of Wren Corporation, transfers property with a basis of $250,000 and a fair market value of $900,000 to Wren Corporation for additional stock. Ashley owns 78% of Wren after the transfer. Two other shareholders in Wren transfer a nominal amount of property to Wren along with Ashley's transfer so that Ashley and the two shareholders own 90% of the Wren stock after the transfer. Does Ashley have taxable gain on the transfer?

Question 63

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?

Question 64

Nancy, Guy, and Rod form Goldfinch Corporation with the following consideration.

Question 65

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.

A) Dawn has a gain on the transfer of $15,000.
B) The basis of the assets to the corporation is $300,000.
C) Dawn has a basis of $10,000 in the stock she receives.
D) Dawn has a zero basis in the stock she receives.
E) None of the above.

Question 66

Pat, Maria, and Lynn are equal shareholders in Lime Corporation. Lime has assets with a basis of $150,000 and a fair market value of $1,200,000. In the current year, Pat lends Lime Corporation $200,000 and Maria lends it $150,000. Both notes bear interest at the rate of 8% per annum. Lime Corporation has no other debt outstanding. Lynn leases machinery to Lime Corporation for an annual rental of $16,000.

A) The IRS will be successful in reclassifying both loans as equity.
B) The IRS will be successful in reclassifying the $200,000 loan as equity.
C) Lime Corporation cannot support its debt-equity ratio.
D) Because the loans are not pro rata and Lime Corporation can support its debt-equity ratio, the loans should not be reclassified as equity.
E) None of the above.

Question 67

Kirby and Helen form Red Corporation. Kirby transfers property, basis of $20,000 and value of $300,000, for 100 shares in Red Corporation. Helen transfers property, basis of $40,000 and value of $280,000, and provides legal services in organizing the corporation. The value of her services is $20,000. In return Helen receives 100 shares in Red Corporation. With respect to the transfers:

A) Kirby will recognize gain.
B) Helen will not recognize any gain or income.
C) Red Corporation will have a basis of $280,000 in the property it acquired from Helen.
D) Red will have a business deduction of $20,000.
E) None of the above.

Question 68

Four individuals form Chickadee Corporation under § 351. Two of these individuals, Jane and Walt, made the following contributions: Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

A) Jane must recognize income of $40,000; Walt has no income.
B) Neither Jane nor Walt recognize income.
C) Walt must recognize income of $130,000; Jane has no income.
D) Walt must recognize income of $100,000; Jane has no income.
E) None of the above.

Question 69

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:

A) Mary will not recognize gain or income.
B) Earl will recognize a gain of $1,400,000.
C) Crow Corporation has a basis of $1,480,000 in the property it received from Mary.
D) Crow will have a business deduction of $120,000 for the value of the services Mary will render.
E) None of the above.

Question 70

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:

A) Thomas has dividend income of $10,500.
B) Grouse Corporation does not have a tax deduction with respect to the payment.
C) Grouse Corporation has an interest expense deduction of $3,500.
D) Thomas has dividend income of $7,000.
E) None of the above.

Question 71

Trudy forms Oak Corporation by transferring land with a basis of $150,000 (fair market value of $800,000), subject to a mortgage of $450,000. Two weeks prior to incorporating Oak, Trudy borrows $10,000 for personal purposes and gives the lender a second mortgage on the land. Oak Corporation issues stock worth $340,000 to Trudy and assumes the two mortgages on the land. What are the tax consequences to Trudy and to Oak Corporation?

Question 72

Shawn transfers property (basis of $40,000 and fair market value of $35,000) to Condor Corporation in exchange for § 1244 stock. The transfer qualifies as a nontaxable exchange under § 351; therefore, Shawn's basis in the Condor stock is $40,000. Five years later, Shawn sells the Condor stock for $25,000. With respect to the sale, Shawn has:

A) An ordinary loss of $15,000.
B) An ordinary loss of $10,000 and a capital loss of $5,000.
C) A capital loss of $15,000.
D) A capital loss of $10,000 and an ordinary loss of $5,000.
E) None of the above.

Question 73

Robert organized Redbird Corporation 10 years ago by contributing property worth $3 million, basis of $550,000, for 2,000 shares of stock in Redbird, representing 100% of the stock in the corporation. Robert later gave each of his children, Brittany and Julie, 600 shares of stock in Redbird Corporation. In the current year, Robert transfers property worth $700,000, basis of $150,000, to Redbird for 1,000 shares in the corporation. What gain, if any, will Robert recognize on the transfer?

Question 74

Leonard transfers equipment (basis of $40,000 and fair market value of $100,000) for additional stock in Green Corporation. After the transfer, Leonard owns 90% of the stock. Leonard had claimed depreciation of $50,000 on the equipment prior to transferring it to Green Corporation. With respect to the transfer:

A) Leonard has ordinary income of $50,000.
B) Leonard has ordinary income of $50,000 and a § 1231 gain of $10,000.
C) Green Corporation has ordinary income of $50,000.
D) Green Corporation has a basis of $40,000 in the equipment and it will have no depreciation recapture if it later disposes of the equipment in a taxable transaction.
E) None of the above.

Question 75

Joe and Kay form Gull Corporation. Joe transfers cash of $250,000 for 200 shares in Gull Corporation. Kay transfers property with a basis of $50,000 and fair market value of $240,000. She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation. The value of Kay's services is $10,000. With respect to the transfer:

A) Gull Corporation has a basis of $240,000 in the property transferred by Kay.
B) Neither Joe nor Kay recognizes gain or income on the exchanges.
C) Gull Corporation has a business deduction under § 162 of $10,000.
D) Gull capitalizes $10,000 as organizational costs.
E) None of the above.

Question 76

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?

Question 77

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:

A) Adam has taxable income of $50,000.
B) Camel Corporation has a tax deduction of $50,000.
C) Adam has no taxable income from the distribution.
D) Camel Corporation reduces its basis in the land to $150,000.
E) None of the above.

Question 78

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

A) Wren Corporation is not permitted a deduction for the loans.
B) The loans result in a nonbusiness bad debt deduction to Wren Corporation.
C) The loans provide Wren Corporation with a business bad debt deduction.
D) Wren claims a capital loss due to the uncollectible loans.
E) None of the above.

Question 79

When Pheasant Corporation was formed under § 351, Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock. Kristen's basis in the Pheasant stock is $26,000. Three years later, Pheasant Corporation goes bankrupt and its stock becomes worthless. Kristen, who is single, owned the stock as an investment. Kristen's loss is:

A) $26,000 capital.
B) $22,500 ordinary and $3,500 capital.
C) $3,500 ordinary and $22,500 capital.
D) $26,000 ordinary.
E) None of the above.

Question 80

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.

A) Carl will have a recognized gain on the transfer of $90,000.
B) Carl will have a recognized gain on the transfer of $30,000.
C) Cardinal Corporation will have a basis in the land transferred by Carl of $70,000.
D) Cardinal Corporation will have a basis in the land transferred by Carl of $160,000.
E) None of the above.