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Exam 12: Organization, Capital Structure, and Operating Rules

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Question 51

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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?

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Perry recognizes a gain of $450,000 on t...

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Question 52

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The control requirement under § 351 requires that the person or persons transferring property to the corporation, immediately after the transfer, own stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

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Question 53

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Four individuals form Chickadee Corporation under § 351.Two of these individuals, Jane and Walt, made the following contributions: $\begin{array}{lrr}&&\text { Fair Market }\\& \underline{\text {Adjusted Basis}}& \underline{\text {Value}}\\\text { From Jane- }\\\text { Cash } & \$ 360,000 & \$ 360,000 \\\text { Patent } & -0- & 40,000 \\\\\text { From Walt- } & & \\\text { Equipment (depreciation claimed of } \$ 100,000) & 240,000 & 370,000\end{array}$ Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

Norma formed Hyacinth Enterprises, a proprietorship, in the current year.During the year, Hyacinth had operating income of $400,000 and operating expenses of $240,000.In addition, Hyacinth had a long-term capital loss of $10,000.Norma withdrew $75,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses, and ignoring any self-employment taxes, how does this information affect her adjusted gross income for the year?

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.

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

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

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.

Flycatcher Corporation, a C corporation, has two equal individual shareholders, Nancy and Pasqual.In the current year, Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder.Regardless of any tax consequences resulting from their interests in Flycatcher, Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket.With respect to the current year, which of the following statements is incorrect?

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

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

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

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:

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.

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.

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.

Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock.Gabriella transfers cash of $50,000, while Maria transfers a proprietary formula (basis of $0; fair market value of $50,000).Neither Gabriella nor Maria will recognize gain on the transfer.

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:

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:

Copper Corporation owns stock in Bronze Corporation and has net operating income of $900,000 for the year.Bronze Corporation pays Copper a dividend of $150,000.What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (assuming Copper's dividends received deduction is not limited by its taxable income) ?