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Exam 9: Corporations: Organization, capital Structure, and Operating Rules

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Question 61

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Hazel transferred the following assets to Starling Corporation. 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.

F) C) and D)
G) B) and E)

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Question 62

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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 10-year 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.

F) C) and E)
G) A) and B)

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Question 63

Multiple Choice

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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:

Nancy Smith is the sole shareholder and employee of White Corporation,a C corporation that is engaged exclusively in accounting services.During the year,White has operating income of $320,000 and operating expenses (excluding salary) of $150,000.Further,White Corporation pays Nancy a salary of $100,000.The salary is reasonable in amount and Nancy is in the 33% marginal tax bracket irrespective of any income from White.Assuming that White Corporation distributes all after-tax income as dividends,how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.)

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.

Beth forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares.Shortly thereafter,she transfers half her shares to her son,Ted.The later transfer to Ted could cause the original transfer to be taxable.

Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later,Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark City.Ann,the sole shareholder,contributes equipment (basis of $70,000 and fair market value of $200,000)to help Orange in its new operations.What are the tax consequences of these transfers to Orange Corporation?

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:

Elk,a C corporation,has $370,000 operating income and $290,000 operating expenses during the year.In addition,Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss.Elk's taxable income is:

In a § 351 transaction,if a transferor receives consideration other than stock,the transaction can be taxable.

Similar to like-kind exchanges,the receipt of "boot" under § 351 can cause loss to be recognized.

In connection with the deduction for startup expenditures,comment on the following: a. Qualifying expenditures b. Election process. c. Amount of deduction

Juanita owns 60% of the stock in a C corporation that had a profit of $200,000 in 2013.Carlos owns a 60% interest in a partnership that had a profit of $200,000 during the year.The corporation distributed $45,000 to Juanita,and the partnership distributed $45,000 to Carlos.Which of the following statements relating to 2013 is incorrect?

In determining whether § 357(c)applies,assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.

The transfer of an installment obligation in a transaction qualifying under § 351 is a disposition of the obligation that causes gain to be recognized by the transferor.

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?

Dick,a cash basis taxpayer,incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation. With respect to this transaction:

During 2013,Sparrow Corporation,a calendar year C corporation,had operating income of $425,000,operating expenses of $280,000,a short-term capital loss of $10,000,and a long-term capital gain of $25,000.How much is Sparrow's tax liability for 2013?

Under the "check-the-box" Regulations,a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.

What is the purpose of Schedule M-3? Which corporations are required to file Schedule M-3?