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Exam 4: Corporations: Organization and Capital Structure

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Question 21

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Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

A) Wren Corporation is not permitted a deduction for the loans.
B) The loans result in a nonbusiness bad debt deduction to Wren Corporation.
C) The loans provide Wren Corporation with a business bad debt deduction.
D) None of the above.

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

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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(b)predominates.

A) True
B) False

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Question 23

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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:

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.

A shareholder's holding period for stock received under § 351 includes the holding period of the property transferred to the corporation.

George transfers cash of $150,000 to Grouse Corporation,a newly formed corporation,for 100% of the stock in Grouse 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,Grouse has net taxable income of $40,000.If Grouse pays George interest of $6,300 and $7,000 principal payment on the note:

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?

Four individuals form Chickadee Corporation under § 351.Two of these individuals,Jane and Walt,made the following contributions: Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

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?

The control requirement under § 351 requires that the person or persons transferring property to the corporation,immediately after the transfer,own stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

Lucy and Marta form Blue Corporation. Lucy transfers land (basis of $40,000 and fair market value of $180,000) for 50 shares plus $20,000 cash. Marta transfers $160,000 cash for 50 shares in Blue Corporation.

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.

All accounts payable of a cash basis taxpayer are included as liabilities under § 357(c)in determining whether liabilities exceed basis.

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.

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

In a § 351 transfer,a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000.Only $7,000 of the boot will be taxed to the shareholder.

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation,Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

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) .

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

The reason for § 351 (which permits transfers to controlled corporations to be tax free)can be justified under the wherewithal to pay concept.