CHAPTER 18 CORPORATIONS: ORGANIZATION AND CAPITAL

1. Joe and Kay form Gull Corporation. Joe transfers cash of $250,000 for 200 shares in Gull Corporation. Kay transfers property with a basis of $50,000 and fair market value of $240,000. She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation. The value of Kay’s services is $10,000. With respect to the transfer:

a. Gull Corporation has a basis of $240,000 in the property transferred by Kay.

b. Neither Joe nor Kay recognizes gain or income on the exchanges.

c. Gull Corporation has a compensation deduction of $10,000.

d. Gull capitalizes $10,000 as organizational costs.

e. None of the above.

2. 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:

a. Mary will not recognize gain or income.

b. Earl will recognize a gain of $1,400,000.

c. Crow Corporation has a basis of $1,480,000 in the property it received from Mary.

d. Crow will have a business deduction of $120,000 for the value of the services Mary will render.

e. None of the above.

3. Four individuals form Chickadee Corporation under § 351. Two of these individuals, Jane and Walt, made the following contributions:

Adjusted Fair Market

Basis Value

From Jane—

Cash $360,000 $360,000

Patent –0– 40,000

From Walt—

Equipment (depreciation claimed of $100,000) 240,000 370,000

Both Jane and Walt receive stock in Chickadee Corporation equal to the value of their investments.

a. Jane must recognize income of $40,000; Walt has no income.

b. Neither Jane nor Walt recognize income.

c. Walt must recognize income of $130,000; Jane has no income.

d. Walt must recognize income of $100,000; Jane has no income.

e. None of the above.

4. 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:

a. Leah recognizes ordinary income of $70,000.

b. The § 1245 depreciation recapture potential carries over to Crow Corporation.

c. The § 1245 depreciation recapture potential disappears.

d. Leah recognizes ordinary income of $70,000 and § 1231 gain of $30,000.

e. None of the above.

5. In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville, Tennessee, the city donates land (fair market value of $400,000) and cash of $100,000 to the corporation. Several months after the donation, Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land.

a. Yellow recognizes income of $100,000 as to the donation.

b. Yellow has a zero basis in the land and a basis of $450,000 in the plant.

c. Yellow recognizes income of $500,000 as to the donation.

d. Yellow has a zero basis in the land and a basis of $350,000 in the plant.

e. None of the above.

6. 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:

a. George has dividend income of $13,300.

b. Finch Corporation does not have a tax deduction with respect to the payment.

c. George has dividend income of $7,000.

d. Finch Corporation has an interest expense deduction of $6,300.

e. None of the above.

7. Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel. In the first year of operation, Camel has net taxable income of $70,000. If Camel distributes $50,000 to Adam:

a. Adam has taxable income of $50,000.

b. Camel Corporation has a tax deduction of $50,000.

c. Adam has no taxable income from the distribution.

d. Camel Corporation reduces its basis in the land to $150,000.

e. None of the above.

8. Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.

a. Wren Corporation is not permitted a deduction for the loans.

b. The loans result in a nonbusiness bad debt deduction to Wren Corporation.

c. The loans provide Wren Corporation with a business bad debt deduction.

d. Wren claims a capital loss due to the uncollectible loans.

e. None of the above.

9. George (an 80% shareholder) has made loans to Mountainview Corporation that become worthless in the current year. George is not employed by Mountainview.

a. George is not permitted a deduction for the worthless loans.

b. The loans provide a nonbusiness bad debt deduction to George in the current year.

c. The loans provide George with a business bad debt deduction.

d. George may claim an ordinary loss as to the worthless loans.

e. None of the above.

10.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. $26,000 capital.

b. $22,500 ordinary and $3,500 capital.

c. $3,500 ordinary and $22,500 capital.

d. $26,000 ordinary.

e. None of the above.

11.Art, an unmarried individual, transfers property (basis of $130,000 and fair market value of $120,000) to Condor Corporation in exchange for § 1244 stock. The transfer qualifies as a nontaxable exchange under § 351. Because the property is loss property, Condor takes a basis in the property of $120,000. Five years later, Art sells the Condor stock for $50,000. With respect to the sale, Art has:

a. An ordinary loss of $80,000.

b. An ordinary loss of $70,000 and a capital loss of $10,000.

c. A capital loss of $80,000.

d. A capital loss of $30,000 and an ordinary loss of $50,000.

e. None of the above.