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Exam 9: Corporations: Organization, capital Structure, and Operating Rules

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Question 21

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Rachel owns 100% of the stock of Cardinal Corporation.In the current year Rachel transfers an installment obligation,tax basis of $180,000 and fair market value of $350,000,for additional stock in Cardinal worth $350,000.

A) Rachel has a taxable gain of $180,000.
B) Rachel has a taxable gain of $170,000.
C) Rachel recognizes no taxable gain on the transfer.
D) Rachel has a basis of $350,000 in the additional stock she received in Cardinal Corporation.
E) None of the above.

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

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Question 22

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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) True
B) False

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Question 23

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Thrush Corporation files Form 1120,which reports taxable income of $200,000.The corporation's tax is $56,250.

For purposes of the estimated tax payment rules,a "large corporation" is defined as a corporation that had an average taxable income of $1 million or more in any of the three preceding years.

The corporate marginal income tax rates range from 15% to 39%,while the individual marginal income tax rates range from 10% to 39.6%.

Three individuals form Skylark Corporation with the following contributions: Cliff,cash of $50,000 for 50 shares; Brad,land worth $20,000 (basis of $11,000) for 20 shares; and Ron,cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

Adrian is the president and sole shareholder of Pigeon Corporation.He also lends money and rents a building to the corporation.Discuss how these business relationships between Adrian and Pigeon Corporation can help avoid double taxation.What limitations are there on the use of such relationships?

Which of the following statements is incorrect regarding the taxation of C corporations?

Which of the following statements is correct regarding the taxation of C corporations?

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.

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?

Because boot is generated under § 357(b)(i.e.,the liability is not supported by a bona fide business purpose),the transferor shareholder will always have to recognize gain.

Bjorn owns a 60% interest in an S corporation that earned $150,000 in 2013.He also owns 60% of the stock in a C corporation that earned $150,000 during the year.The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn.How much income must Bjorn report from these businesses?

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

Robin Corporation,a calendar year C corporation,had taxable income of $1.9 million,$1.2 million,and $900,000 for 2010,2011,and 2012,respectively.Robin has taxable income of $1.5 million for 2012.The minimum 2012 estimated tax installment payments for Robin are:

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.

Because services are not considered property under § 351,a taxpayer must report as income the fair market value of stock received for such services.

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.

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.

For transfers falling under § 351,what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?