Chapter 2 None The Above 36 This Year And

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CHAPTER 2—CORPORATE FORMATION AND CAPITAL

STRUCTURE Key

1. During the year, R and S established T Corporation, which issued 100 shares of stock. R transferred land

worth $9,000 (basis $8,000) to the corporation for 90 shares of stock while S contributed services worth $1,000

for 10 shares of stock. Neither R nor S must recognize income due to their respective transfers.

2. An individual provides accounting services to a corporation in exchange for stock. The shareholder must

recognize income and the corporation may deduct or capitalize the expenditure as would be appropriate.

3. B owns 85 percent of the stock of D Corporation, and C owns the remaining 15 percent. The corporation has

been in operation for three years. During the year, B transferred land worth $20,000 (basis $11,000) to the

corporation for additional shares, increasing his ownership to 88 percent. B is not required to recognize gain on

4. G owns 85 percent of the stock of X Corporation, and H owns the remaining 15 percent. The corporation has

been in operation for three years. During the year, G transferred land worth $20,000 (basis $11,000) to the

corporation for a note bearing 10 percent interest and maturing in 15 years. G is not required to recognize gain

on the transfer.

5. J owns all 150 shares of stock of Y Corporation, worth $500,000. This year he convinced his son K to come

into business with him. To this end, K contributes appreciated property worth $100,000 (basis $5,000) to the

corporation for 50 shares of Y stock. K should recognize no gain on the transfer, assuming his father also

transfers cash of $25,000.

6. M incorporated her proprietorship this year. After receiving all of the stock of her new corporation, she

immediately transferred 30 percent of the stock to her sister. M’s exchange is not taxable even though she

retained control only briefly after the exchange.

7. J formed X Corporation during the year by transferring land worth $50,000 to the corporation in exchange for

all of its stock. The property had a basis of $20,000 and was subject to a mortgage of $15,000, which the

corporation assumed. As a general rule, J must recognize gain of $15,000.

8. P formed Y Corporation by transferring property worth $70,000 to the corporation for all of its stock. The

property had a basis of $30,000 and was subject to a mortgage of $10,000. P’s basis in her stock is $20,000.

9. During the year, Proprietor incorporated his hobby shop in a transaction that generally qualifies for

nonrecognition under § 351. As part of the formation, he transferred various liabilities to the new corporation,

including a bill for a recent shipment of Prestochangos, the hottest toy on the market. When the corporation

later paid the bill, it properly charged the items to its inventory account. In determining the tax consequences of

exchange, the liability is ignored for determining Proprietor’s gain recognized.

10. N established L Corporation by transferring property worth $100,000 (basis $25,000) to the

corporation for all of its stock. N’s basis in the stock received is the same as the corporation’s basis for the

property, $25,000.

11. The holding period of stock received in an exchange qualifying for nontaxable treatment under § 351 begins

on the date the transferred asset was acquired, assuming the asset was a building used in the transferor’s sole

proprietorship.

12. If a corporation receives a nonshareholder contribution representing an inducement rather than payment for

corporate goods or services, the corporation must include the transfer in gross income.

13. If a corporation receives a nonshareholder contribution representing an inducement rather than payment for

corporate goods or services, the corporation must include the transfer in gross income.

14. A court decision that recharacterizes a corporation’s debt obligations as stock normally would result in

unfavorable tax consequences for an individual holding the purported debt.

15. Assuming both investments become worthless after three years, a married individual investing in a

corporation would be indifferent to whether he receives a $20,000 note or $20,000 of § 1244 stock in exchange

for a $20,000 transfer.

16. Holder contributed $50,000 to a newly formed corporation in exchange for § 1244 stock. During the year,

he sold the stock to Buyer. The stock qualifies as § 1244 stock in Buyer’s hands.

17. Contributor transferred $50,000 to his newly formed corporation in exchange for § 1244 stock. During the

year, he gave some of the stock to his son who will someday own the entire business. The stock qualifies as §

1244 stock in the son’s hands.

18. T Corporation transferred $75,000 to a newly formed corporation in exchange for stock. At the time of the

contribution, the new corporation’s total capital was $500,000. T Corporation’s stock qualifies as § 1244 stock.

19. Transferor contributed $180,000 of cash to his newly formed corporation in exchange for stock. As part of

the same plan, Manager received $20,000 of stock for services to be performed during the first year of business.

Manager’s stock qualifies as § 1244 stock.

20. Transferor contributed $120,000 to a newly formed corporation in exchange for stock. At the time of the

contribution, the corporation’s total contributed capital was $5 million. Transferor‘s stock qualifies as § 1244

stock.

21. This year D transferred property worth $10,000 (basis $6,000) to a newly formed corporation in exchange

for all of its stock worth $10,000.

22. Several years ago, Theodore Theory started his own company for manufacturing peripheral equipment such

as memory chips and boards. This year he transferred all of the assets and liabilities of his high-tech business,

worth $10 million, to a newly formed corporation in exchange for 10 percent of its stock. The other transferor

was a large conglomerate that contributed the assets of its technology division, worth $90 million, to the

corporation in exchange for 90 percent of the stock. Theo retired to Florida and followed his investment in The

Wall Street Journal while the conglomerate took over total control of the new enterprise. Which of the

following statements is true?

23. This year C and D formed a new corporation. C and D both contributed appreciated property, receiving 90

and 10 shares of the corporation’s stock respectively.

24. T Corporation was formed 10 years ago by J, K, and L. These three shareholders currently own all of the

corporation’s stock as follows: J owns 500 shares, K owns 100 shares, and L owns 100 shares. This year J

contributed property worth $90,000 (basis $20,000) to the corporation in exchange for an additional 300 shares.

J will

25. During the year, M, N, and O formed a new corporation. Solely in exchange for stock, M and N contributed

appreciated property, while O contributed services. The exchanges of M and N will be nontaxable if

26. During the year, R, S, T, and U formed a new corporation. R contributed appreciated property, S and T

contributed cash, and U contributed services. R, S, T, and U each received XU of the stock. Based on these

facts

27. This year X, Y, and Z formed a new corporation. X and Y contributed appreciated property for 50 percent of

the stock. Z contributed property and services for the remaining 50 percent of the stock. Of the amounts given

below, what is the minimum amount of stock that Z must receive for his property contribution if the exchanges

of X and Y are to be nontaxable.

28. F and G formed a corporation on March 1 this year. F transferred equipment worth $40,000 (basis $15,000)

in exchange for 40 shares of stock, and performed services worth $10,000 in exchange for 10 shares of stock. In