CHAPTER 18 CORPORATIONS: ORGANIZATION AND CAPITAL

1. Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000; land by Tony (basis of $25,000 and fair market value of $35,000). Dove Corporation issues 400 shares of stock, 200 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000.

a. Section 351 cannot apply since Sarah should have received 260 shares instead of only 200.

b. Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.

c. Tony’s basis in the stock of Dove Corporation is $50,000.

d. As a result of the transfer, Tony recognizes a gain of $10,000.

e. None of the above.

2. 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.

a. Rhonda’s basis in the Blue Corporation stock is $55,000.

b. Blue Corporation’s basis in the land is $55,000.

c. Blue Corporation’s basis in the land is $180,000.

d. Rhonda recognizes a gain on the transfer of $125,000.

e. None of the above.

3. Erica transfers land worth $500,000, basis of $100,000, to a newly formed corporation, Robin Corporation, for all of Robin’s stock, worth $300,000, and a 10­year note. The note was executed by Robin and made payable to Erica in the amount of $200,000. As a result of the transfer:

a. Erica does not recognize gain.

b. Erica recognizes gain of $400,000.

c. Robin Corporation has a basis of $100,000 in the land.

d. Robin Corporation has a basis of $300,000 in the land.

e. None of the above.

4. Hazel transferred the following assets to Starling Corporation.

	Adjusted	Fair Market
Basis	Value
Cash	$120,000	$120,000
Machinery	48,000	36,000
Land	108,000	144,000

In exchange, Hazel received 50% of Starling Corporation’s only class of stock outstanding. The stock has no established value. However, all parties believe that the value of the stock Hazel received is the equivalent of the value of the assets she transferred. The only other shareholder, Rick, formed Starling Corporation five years ago.

a. Hazel has no gain or loss on the transfer.

b. Starling Corporation has a basis of $48,000 in the machinery and $108,000 in the land.

c. Starling Corporation has a basis of $36,000 in the machinery and $144,000 in the land.

d. Hazel has a basis of $276,000 in the stock of Starling Corporation.

e. None of the above.

5. 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.

a. Dawn has a gain on the transfer of $15,000.

b. The basis of the assets to the corporation is $300,000.

c. Dawn has a basis of $10,000 in the stock she receives.

d. Dawn has a zero basis in the stock she receives.

e. None of the above.

6. Carl transfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000. The land, which has a basis to Carl of $70,000, is worth $160,000.

a. Carl will have a recognized gain on the transfer of $90,000.

b. Carl will have a recognized gain on the transfer of $30,000.

c. Cardinal Corporation will have a basis in the land transferred by Carl of $70,000.

d. Cardinal Corporation will have a basis in the land transferred by Carl of $160,000.

e. None of the above.

7. Kirby and Helen form Red Corporation. Kirby transfers property, basis of $20,000 and value of $300,000, for 100 shares in Red Corporation. Helen transfers property, basis of $40,000 and value of $280,000, and provides legal services in organizing the corporation. The value of her services is $20,000. In return Helen receives 100 shares in Red Corporation. With respect to the transfers:

a. Kirby will recognize gain.

b. Helen will not recognize any gain or income.

c. Red Corporation will have a basis of $280,000 in the property it acquired from Helen.

d. Red will have a business deduction of $20,000.

e. None of the above.