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Exam 12: Organization, Capital Structure, and Operating Rules

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Question 71

True/False

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Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

A) True
B) False

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Question 72

Multiple Choice

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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.

A) The transfers to Luster are fully taxable to both Gabriella and Juanita.
B) Juanita must recognize gain of $50,000.
C) Because Juanita is required to recognize gain on the transfer, Gabriella also must recognize gain.
D) Neither Gabriella nor Juanita will recognize gain on the transfer.
E) None of the above.

F) B) and C)
G) All of the above

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Question 73

Multiple Choice

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Rob and Fran form Bluebird Corporation with the following investments. $\begin{array} { l r r } &&\text { Fair Market }\\& \text { Adjusted Basis } & \text { Value } \\\text { From Rob-Cash } & \$ 400,000 & \$ 400,000 \\\text { From Fran-Land } &500,000 & 440,000\\\end{array}$ ? 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:

In order to retain the services of Eve, a key employee in Ted's sole proprietorship, Ted contracts with Eve to make her a 30% owner.Ted incorporates the business receiving in return 100% of the stock.Three days later, Ted transfers 30% of the stock to Eve.Under these circumstances, § 351 will not apply to the incorporation of Ted's business.

Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation.Azul owns 25% of the Naranja Corporation stock.Assuming it is not subject to the taxable income limitation, Azul's dividends received deduction is $21,000.

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.

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.

Ruth transfers property worth $200,000 (basis of $60,000) to Goldfinch Corporation.In return, she receives 80% of its stock (worth $180,000) and a long-term note, executed by Goldfinch and made payable to Ruth (worth $20,000).Ruth will recognize no gain on the transfer.

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income.However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

George transfers cash of $150,000 to Finch Corporation, a newly formed corporation, for 100% of the stock in Finch worth $80,000 and debt in the amount of $70,000, payable in equal annual installments of $7,000 plus interest at the rate of 9% per annum.In the first year of operation, Finch has net taxable income of $40,000.If Finch pays George interest of $6,300 and $7,000 principal payment on the note:

No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

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:

Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2017.The following expenses were incurred during the first tax year (April 1 through December 31, 2017) of operations. $\begin{array}{lr}\text { Expenses of temporary directors and of organizational meetings } & \$ 27,000 \\\text { Fee paid to the state of incorporation } & 1,000 \\\text { Accounting services incident to organization } & 15,500 \\\text { Legal services for drafting the corporate charter and bylaws } & 9,500 \\\text { Expenses incident to the printing and sale of stock certificates } & 6,000\end{array}$ ? Assuming a § 248 election, what is the Emerald's deduction for organizational expenditures for 2017?