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

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Question 71

Multiple Choice

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Wade and Paul form Swan Corporation with the following investments.Wade transfers machinery (basis of $40,000 and fair market value of $100,000) and Paul transfers land (basis of $20,000 and fair market value of $90,000) and services rendered (worth $10,000) in organizing the corporation.Each is issued 25 shares in Swan Corporation.With respect to the transfers:

A) Wade has no recognized gain; Paul recognizes income/gain of $80,000.
B) Neither Wade nor Paul has recognized gain or income on the transfers.
C) Swan Corporation has a basis of $30,000 in the land transferred by Paul.
D) Paul has a basis of $30,000 in the 25 shares he acquires in Swan Corporation.
E) None of these.

F) D) and E)
G) A) and E)

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Question 72

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Rachel is the sole member of an LLC, and Jordan is the sole shareholder of a C corporation.Both businesses were started in the current year, and each business has a long-term capital gain of $10,000 for the year.Neither business made any distributions during the year.With respect to this information, which of the following statements is correct?

A) The C corporation receives a preferential tax rate on the LTCG of $10,000.
B) The LLC must pay corporate tax on taxable income of $10,000.
C) Jordan must report $10,000 of LTCG on his tax return.
D) Rachel must report $10,000 of LTCG on her tax return.
E) None of the above.

F) All of the above
G) A) and E)

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Question 73

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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.

Gabriella and Juanita form Luster Corporation.Gabriella transfers cash of $50,000 for 50 shares of stock, and Juanita transfers information concerning a proprietary process (basis of zero and fair market value of $50,000) for 50 shares of stock.

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:

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

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:

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation.The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

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

Which of the following statements is incorrect regarding the taxation of C corporations for tax years beginning after 2017?

Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000) executed by Green Corporation and made payable to Jane.As a result of the transfer:

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.

No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.

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

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 calendar year personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $21,000.