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

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Question 51

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

A) True
B) False

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Question 52

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Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

A) True
B) False

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Question 53

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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.

Earl and Mary form Crow Corporation.Earl transfers property, basis of $200,000 and value of $1,600,000, for 50 shares in Crow Corporation.Mary transfers property, basis of $80,000 and value of $1,480,000, and agrees to serve as manager of Crow for one year; in return Mary receives 50 shares of Crow.The value of Mary's services is $120,000.With respect to the transfers:

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?

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:

A transferor who receives stock for both property and services may not be included in the control group in determining whether an exchange meets the requirements of § 351.

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 apply to the incorporation of Ted's business.

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

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.

Eve transfers property (basis of $120,000 and fair market value of $400,000) to Green Corporation for 80% of its stock (worth $350,000) and a long-term note (worth $50,000) executed by Green Corporation and made payable to Eve.As a result of the transfer:

Jane and Walt form Yellow Corporation.Jane transfers equipment worth $950,000 (basis of $200,000) and cash of $50,000 to Yellow Corporation for 50% of its stock.Walt transfers a building and land worth $1,050,000 (basis of $400,000) for 50% of Yellow's stock and $50,000 in cash.

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation.After the transfer, Leah owns 80% of Crow's stock.Associated with the equipment is § 1245 depreciation recapture potential of $70,000.As a result of the transfer:

Donald owns a 45% interest in a partnership that earned $130,000 in the current year.He also owns 45% of the stock in a C corporation that earned $130,000 during the year.Donald received $20,000 in distributions from each of the two entities during the year.With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year.

Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2019.The following expenses were incurred during the first tax year (April 1 through December 31, 2019) of operations. Assuming a § 248 election, what is the Emerald's deduction for organizational expenditures for 2019?

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.

When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351, the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.

In determining whether § 357(c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

When depreciable property is transferred to a controlled corporation under § 351, any recapture potential disappears and does not carry over to the corporation.

Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation.Canary owns 18% of the Stork Corporation stock.Assuming it is not subject to the taxable income limitation, Canary's dividends received deduction is $40,000.