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Exam 12: Corporations: Organization, Capital Structure, and Operating Rules

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Question 71

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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 compensation deduction of $10,000.
D) Gull capitalizes $10,000 as organizational costs.
E) None of the above.

F) A) and B)
G) B) and E)

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Question 72

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Albert transfers land (basis of $140,000 and fair market value of $320,000) to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000. Gold assumes Albert's mortgage on the land of $200,000.

A) Albert has a recognized gain on the transfer of $140,000.
B) Albert has a recognized gain on the transfer of $80,000.
C) Albert has a recognized gain on the transfer of $60,000.
D) Gold Corporation has a basis in the land of $220,000.
E) None of the above.

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

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Question 73

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Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2016. Hornbill incurred the following expenses during its first year of operations (May 1 - December 31, 2016): temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and bylaws of $7,500. Hornbill Corporation's current year deduction for organizational expenditures is $5,800.

An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1.

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.

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.

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.

Quail Corporation is a C corporation with net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income.

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

Sean, a sole proprietor, is engaged in a service business and uses the cash basis of accounting. In the current year, Sean incorporates his business by forming Aqua Corporation. In exchange for all of its stock, Aqua receives: assets (basis of $400,000 and fair market value of $2 million), trade accounts payable of $110,000, and loan due to a bank of $390,000. The proceeds from the bank loan were used by Sean to provide operating funds for the business. Aqua Corporation assumes all of the liabilities transferred to it. a.Does Sean recognize any gain on the incorporation? Explain. b.What basis does Sean have in the Aqua stock? c.What basis does Aqua Corporation have in the assets it receives?

A shareholder contributes land to his wholly owned corporation but receives no stock in return. The corporation has a zero basis in the land.

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.

A city contributes $500,000 to a corporation as an inducement to locate in the city. Within the next 12 months, the corporation uses the money to purchase property. The corporation has income of $500,000 and must reduce its tax basis in the property by the same amount.

Nancy, Guy, and Rod form Goldfinch Corporation with the following consideration. ​ Goldfinch issues its 500 shares of stock as follows: 250 to Nancy, 200 to Guy, and 50 to Rod. In addition, Guy gets $50,000 in cash. a.Does Nancy, Guy, or Rod recognize gain (or income)? b.What basis does Guy have in the Goldfinch stock? c.What basis does Goldfinch Corporation have in the inventory? In the land and building? d.What basis does Rod have in the Goldfinch stock?

A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is an addition on Schedule M-1?

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.

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) ?

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?

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