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

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Question 41

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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.

A) True
B) False

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Question 42

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Heron Corporation,a calendar year,accrual basis taxpayer,provides the following information for this year and asks you to prepare Schedule M-1:

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Net income per books...

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Question 43

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Rhonda and Marta form Blue Corporation.Rhonda transfers land (basis of $55,000 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.

Ann transferred land worth $200,000,with a tax basis of $40,000,to Brown Corporation,an existing entity,for 100 shares of its stock.Brown Corporation has two other shareholders,Bill and Bob,each of whom holds 100 shares.With respect to the transfer:

Rita forms Finch Corporation by transferring land (basis of $125,000; fair market value of $750,000)which is subject to a mortgage of $375,000.Two weeks prior to incorporating Finch,Rita borrows $125,000 for personal purposes and gives the lender a second mortgage on the land.Finch Corporation issues stock worth $250,000 to Rita and assumes the two mortgages on the land.What are the tax consequences to Rita and to Finch Corporation?

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

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

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:

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

A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250.

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?

Basis of appreciated property transferred minus boot received (including liabilities transferred)plus gain recognized equals basis of stock received in a § 351 transfer.

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

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?

Sean,a sole proprietor,is engaged in a service business and uses the cash basis of accounting.In the current year,Sean incorporates his business by forming Aqua Corporation.In exchange for all of its stock,Aqua receives: assets (basis of $400,000 and fair market value of $2 million),trade accounts payable of $110,000,and loan due to a bank of $390,000.The proceeds from the bank loan were used by Sean to provide operating funds for the business.Aqua Corporation assumes all of the liabilities transferred to it.

Tan Corporation desires to set up a manufacturing facility in the western part of the United States.After considerable negotiations with Butte,Montana,Tan accepts the following offer: land (fair market value of $4.5 million)and cash of $1.5 million.

A corporation must file a Federal income tax return even if it has no taxable income for the year.

Warbler Corporation,an accrual method regular corporation,was formed and began operations on March 1,2013.The following expenses were incurred during its first year of operations (March 1 - December 31,2013):

Azul Corporation,a calendar year C corporation,received a dividend of $30,000 from Naranja Corporation.Azul owns 25% of the Naranja Corporation stock.Assuming it is not subject to the taxable income limitation,Azul's dividends received deduction is $21,000.

A taxpayer transfers assets and liabilities to a corporation in return for its stock.If the liabilities exceed the basis of the assets transferred,the taxpayer will have a negative basis in the stock.