CHAPTER 18 CORPORATIONS: ORGANIZATION AND CAPITAL

1. Eileen transfers property worth $200,000 (basis of $190,000) to Goldfinch Corporation. In return, she receives 80% of the stock in Goldfinch Corporation (fair market value of $180,000) and a long-term note (fair market value of $20,000) executed by Goldfinch and made payable to Eileen. Eileen recognizes gain on the transfer of:

a. $0.

b. $10,000.

c. $20,000.

d. $190,000.

e. None of the above.

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

a. The transfers to Luster are fully taxable to both Gabriella and Juanita.

b. Juanita must recognize gain of $50,000.

c. Because Juanita is required to recognize gain on the transfer, Gabriella also must recognize gain.

d. Neither Gabriella nor Juanita will recognize gain on the transfer.

e. None of the above.

3. Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land worth $20,000 (basis of $11,000) for 20 shares; and Ron, cattle worth $9,000 (basis of $6,000) for 9 shares and services worth $21,000 for 21 shares.

a. These transfers are fully taxable and not subject to § 351.

b. Ron’s basis in his stock is $27,000.

c. Ron’s basis in his stock is $6,000.

d. Brad’s basis in his stock is $20,000.

e. None of the above.

4. Kevin and Nicole form Indigo Corporation with the following transfers: inventory from Kevin (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo. The corporation’s stock is distributed equally to Kevin and Nicole. As a result of these transfers:

a. Indigo can deduct $25,000 as a business expense.

b. Nicole has a recognized gain of $55,000 on the transfer of the real estate.

c. Indigo has a basis of $360,000 in the inventory.

d. Indigo has a basis of $375,000 in the real estate.

e. None of the above.

5. 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:

a. Ann has no recognized gain.

b. Brown Corporation has a basis of $160,000 in the land.

c. Ann has a basis of $200,000 in her 100 shares in Brown Corporation.

d. Ann has a basis of $40,000 in her 100 shares in Brown Corporation.

e. None of the above.

6. Dick, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Orange Corporation.

	Adjusted	Fair Market
Basis	Value
Cash	$ 10,000	$ 10,000
Building	120,000	175,000
Mortgage payable (secured by the building and held for 15 years)	135,000	135,000
With respect to this transaction: a. Orange Corporation’s basis in the building is $120,000.
b. Dick has no recognized gain.
c. Dick has a recognized gain of $5,000.
d. Dick has a recognized gain of $10,000.
e. None of the above.

7. Albert transfers land (basis of $140,000 and fair market value of $320,000) to Gold Corporation for 80% of its stock and a note payable in the amount of $80,000. Gold assumes Albert’s mortgage on the land of $200,000.

a. Albert has a recognized gain on the transfer of $140,000.

b. Albert has a recognized gain on the transfer of $80,000.

c. Albert has a recognized gain on the transfer of $60,000.

d. Gold Corporation has a basis in the land of $220,000.

e. None of the above.

8. 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. Rachel has a taxable gain of $180,000.

b. Rachel has a taxable gain of $170,000.

c. Rachel recognizes no taxable gain on the transfer.

d. Rachel has a basis of $350,000 in the additional stock she received in Cardinal Corporation.

e. None of the above.

9. Rob and Fran form Bluebird Corporation with the following investments.

Adjusted Fair Market

Basis Value

From Rob—

Cash $400,000 $400,000

From Fran—

Land 500,000 440,000

Each receives 50% of Bluebird’s stock. In addition, Fran receives cash of $40,000. One result of these transfers is that Fran has a:

a. Recognized loss of $60,000.

b. Recognized loss of $20,000.

c. Basis of $460,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000).

d. Basis of $400,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000).

e. None of the above.

10.Wade and Paul form Swan Corporation with the following investments. Wade transfers machinery (basis of $40,000 and fair market value of $100,000), while 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 the above.

11.Rick transferred the following assets and liabilities to Warbler Corporation.

	Adjusted Basis	Fair Market Value
Building	$210,000	$225,000
Equipment	45,000	75,000
Trucks	15,000	30,000
Mortgage (held for four years) on building	30,000	30,000

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).

a. Rick has a recognized gain of $60,000.

b. Rick has a recognized gain of $75,000.

c. Rick’s basis in the stock of Warbler Corporation is $270,000.

d. Warbler Corporation has the same basis in the assets received as Rick does in the stock.

e. None of the above.