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

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Question 61

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In general, the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer.

A) True
B) False

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Question 62

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In structuring the capitalization of a corporation, the tax law is neutral for the investor as to debt versus equity financing.

A) True
B) False

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Question 63

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The use of § 351 is not limited to the initial formation of a corporation, and it can apply to later transfers as well.

Lucinda is a 60% shareholder in Rhea Corporation, a calendar year S corporation. During the year, Rhea Corporation had gross income of $550,000 and operating expenses of $380,000. In addition, the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000. During the year, Rhea Corporation distributed $50,000 to Lucinda. With respect to this information, which of the following statements is correct?

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:

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

During the current year, Skylark Company had operating income of $420,000 and operating expenses of $250,000. In addition, Skylark had a long-term capital loss of $20,000, and a charitable contribution of $5,000. How does Toby, the sole owner of Skylark Company, report this information on his individual income tax return under following assumptions? a.Skylark is an LLC, and Toby does not withdraw any funds from the company during the year. b.​Skylark is an S corporation, and Toby does not withdraw any funds from the company during the year. c.​Skylark is a regular (C) corporation, and Toby does not withdraw any funds from the company during the year.

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.

Amber Company has $100,000 in net income in the current year before deducting any compensation or other payment to its sole owner, Alfredo. Assume that Alfredo is in the 33% marginal tax bracket. Discuss the tax aspects of each of the following independent situations. (Assume that any salaries are reasonable in amount and ignore any employment tax considerations.) a.Alfredo operates Amber Company as a proprietorship. b.Alfredo incorporates Amber Company and pays himself no salary and no dividend. c.​Alfredo incorporates Amber Company and pays himself a $50,000 salary and a dividend of $42,500 ($50,000 - $7,500 corporate income tax).

What is the rationale underlying the tax deferral treatment available under § 351?

In return for legal services worth $60,000 rendered incident to its formation, Crimson Corporation issues stock to Greta, an attorney. Crimson cannot immediately deduct the value of any of this stock but instead must capitalize it as an organizational expenditure.

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

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:

Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.

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.

Four years ago, Don, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244, at a cost of $60,000. Don wants to give his son, Ron, $20,000 to help finance Ron's college education. The stock is currently worth $20,000. Don is considering selling the stock in the current year for $20,000 and giving the cash to Ron. As an alternative, Don could give the stock to Ron and let Ron sell it for $20,000. Which alternative should Don choose?

When Pheasant Corporation was formed under § 351, Kristen transferred property (basis of $26,000 and fair market value of $22,500) for § 1244 stock. Kristen's basis in the Pheasant stock is $26,000. Three years later, Pheasant Corporation goes bankrupt and its stock becomes worthless. Kristen, who is single, owned the stock as an investment. Kristen's loss is:

Hazel transferred the following assets to Starling Corporation. ​ In exchange, Hazel received 50% of Starling Corporation's only class of stock outstanding. The stock has no established value. However, all parties believe that the value of the stock Hazel received is the equivalent of the value of the assets she transferred. The only other shareholder, Rick, formed Starling Corporation five years ago.

In each of the following independent situations, determine the corporation's income tax liability. Assume that all corporations use a calendar year 2016. ​ ​

Jake, the sole shareholder of Peach Corporation, a C corporation, has the corporation pay him $100,000. For income tax purposes, Jake would prefer to have the payment treated as dividend instead of salary.