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Exam 4: Corporations: Organization and Capital Structure

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Question 51

True/False

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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.

A) True
B) False

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Question 52

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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.

F) B) and C)
G) B) and E)

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Question 53

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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?

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

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?

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.

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:

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.

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:

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:

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.

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:

Stock in Merlin Corporation is held equally by Jane, Eve, and Fred. Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000. Jane, Eve, and Fred propose to loan Merlin $2,000,000 each, taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate. Merlin Corporation has current taxable income of $7,000,000. How are the payments on the notes treated for tax purposes?