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Exam 4: Corporations: Organization and Capital Structure

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Question 31

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In order to encourage the redevelopment of its urban center,the city of Birmingham contributes undeveloped land (fair market value of $900,000)and cash of $350,000 to Blue Corporation.Within the year,Blue constructs a new office building at the site at a cost of $850,000.

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Question 32

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

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Question 33

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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.

Rob and Fran form Bluebird Corporation with the following investments. Each receives 50% of Bluebird's stock.In addition,Fran receives cash of $40,000.One result of these transfers is that Fran has a:

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.

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:

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000;land by Tony (basis of $25,000 and fair market value of $35,000) .Dove Corporation issues 400 shares of stock,200 each to Sarah and Tony.Thus,each receives stock in Dove worth $50,000.

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.

As part of a § 351 transfer,a shareholder receives boot.If a realized loss resulted,none of the boot is taxed.

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?

If a transaction qualifies under § 351,any recognized gain is equal to the value of the boot received.

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.

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:

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

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

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.

Barry and Irv form Rapid Corporation.Barry transfers cash of $150,000 and equipment (basis of $300,000 and fair market value of $350,000)for 50% of Rapid's stock.Irv transfers land and building (basis of $510,000 and fair market value of $425,000)and agrees to manage the business for one year for the other 50% of Rapid's stock.The value of Irv's services for one year is $75,000.

Linda formed Pink Corporation with an investment of $200,000 cash,for which she received $20,000 in stock and $180,000 in 5% interest-bearing bonds maturing in ten years.A few years later Linda loaned Pink an additional $40,000 on open account.Pink becomes insolvent in the current year and is adjudged bankrupt.Linda was the president of Pink Corporation and was paid an annual salary of $35,000 for the past three years.Linda has no other employment.How will Linda treat her losses for tax purposes?

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