Chapter C2 Corporate Formations and Capital Structure

108) On May 1 of the current year, Kiara, Victor, Pam, and Joe form Newco Corporation with the following investments:

Property Transferred

Number of

Transferor Asset Basis to Transferor FMV common

shares issued

Kiara Land $12,000 $30,000

Building 38,000 70,000 400

Mortgage and the

land & building 60,000 60,000

Victor Equipment 25,000 40,000 300

Pam Van 15,000 10,000 50

Joe Accounting Services -0- 10,000 100

Kiara purchased the land and building several years ago for $12,000 and $50,000, respectively. Kiara has claimed straight-line depreciation on the building. Victor also received a Newco Corporation note for $10,000 due in three years. The note bears interest at a rate acceptable to the IRS. Victor purchased the equipment three years ago for $50,000. Pam also receives $5,000 cash. Pam purchased the van two years ago for $20,000.

a) Does the transaction satisfy the requirements of Sec. 351?

b) What are the amounts and character of the reorganized gains or losses to Kiara, Victor, Pam, Joe, and Newco Corporation?

c) What is each shareholder's basis for his or her Newco stock? When does the holding period for the stock begin?

d) What is Newco Corporation's basis for its property and services? When does its holding period begin for each property?

109) Lynn transfers property with a $56,000 adjusted basis and a $100,000 FMV to Florida Corporation for 75 shares of Florida stock. Fred, Lynn's father, transfers property with a $64,000 adjusted basis and a $100,000 FMV to Florida Corporation for the remaining 25 shares of Florida stock.

a) What is the amount of each transferor's gain or loss?

b) What is Lynn's basis for her Florida stock?

c) What is Fred's basis for his Florida stock?

110) Norman transfers machinery that has a $45,000 basis and a $105,000 FMV and $30,000 in money to Elnor Corporation in exchange for 50 shares of Elnor stock. The machinery, used in Norman's business, originally cost him $150,000 and is subject to a $84,000 liability which Elnor Corporation assumes. Kate exchanges $51,000 cash for the remaining 50 shares of Elnor stock.

a) What is the amount and character of Norman's recognized gain or loss?

b) What is his basis in the Elnor stock?

c) What is Elnor's basis in the machinery?

d) What is the amount and character of Kate's recognized gain or loss?

e) What is Kate's basis in the Elnor stock?

f) When do Norman and Kate's holding periods for their stock begin?

111) What is the impact on a transferor if a Sec. 351 exchange involves the assumption of the shareholder's liabilities by the corporation?

112) What is the tax treatment for a contribution of capital to a corporation by a nonshareholder?