Question;369. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que69;Thomas transfers cash of $160,000 to Grouse Corporation, a newly formed;corporation, for 100% of the stock in Grouse worth $90,000 and debt in the;amount of $70,000, payable in equal annual installments of $7,000 plus interest;at the rate of 5% per annum. In the first year of operation, Grouse has net;taxable income of $40,000. If Grouse pays Thomas interest of $3,500 and $7,000;principal payment on the note;a.;Thomas has dividend income of $10,500.;b. Grouse Corporation does not have a;tax deduction with respect to the payment.;c. Grouse Corporation has an interest;expense deduction of $3,500.;d. Thomas has dividend income of $7,000.;e. None of the above.;370. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que70;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.;371. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que71;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.;372. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que72;Pat, Maria, and Lynn are equal shareholders in Lime Corporation. Lime has;assets with a basis of $150,000 and a fair market value of $1,200,000. In the;current year, Pat lends Lime Corporation $200,000 and Maria lends it $150,000.;Both notes bear interest at the rate of 8% per annum. Lime Corporation has no;other debt outstanding. Lynn leases machinery to Lime Corporation for an annual;rental of $16,000.;a.;The IRS will be successful in reclassifying both loans as equity.;b. The IRS will be successful in;reclassifying the $200,000 loan as equity.;c. Lime Corporation cannot support its;debt-equity ratio.;d. Because the loans are not pro rata;and Lime Corporation can support its debt-equity ratio, the loans should not be;reclassified as equity.;e. None of the above.;373. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que73;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.;374. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que74;Shawn transfers property (basis of $40,000 and fair market value of $35,000) to;Condor Corporation in exchange for ? 1244 stock. The transfer qualifies as a;nontaxable exchange under ? 351, therefore, Shawn?s basis in the Condor stock;is $40,000. Five years later, Shawn sells the Condor stock for $25,000. With;respect to the sale, Shawn has;a.;An ordinary loss of $15,000.;b. An ordinary loss of $10,000 and a;capital loss of $5,000.;c. A capital loss of $15,000.;d. A capital loss of $10,000 and an;ordinary loss of $5,000.;e. None of the above.;375. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que75;Penny, Miesha, and Sabrina transfer property to Owl Corporation for 75% of its;stock. Nancy, their attorney, receives 25% of the stock in Owl for legal;services rendered in incorporating the business. What are the tax consequences;of these transactions? How should;this transaction have been handled?;376. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que76;Julio exchanges property, basis of $100,000 and fair market value of $1.8;million, for 75% of the stock of Lime Corporation. The other 25% is owned by;Gloria who acquired it several years ago. What are the tax consequences to the;parties involved?;377. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que77;Robert organized Redbird Corporation 10 years ago by contributing property;worth $3 million, basis of $550,000, for 2,000 shares of stock in Redbird;representing 100% of the stock in the corporation. Robert later gave each of;his children, Brittany and Julie, 600 shares of stock in Redbird Corporation.;In the current year, Robert transfers property worth $700,000, basis of $150,000;to Redbird for 1,000 shares in the corporation. What gain, if any, will Robert;recognize on the transfer?;378. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que78;Ashley, a 70% shareholder of Wren Corporation, transfers property with a basis;of $250,000 and a fair market value of $900,000 to Wren Corporation for;additional stock. Ashley owns 78% of Wren after the transfer. Two other;shareholders in Wren transfer a nominal amount of property to Wren along with;Ashley?s transfer so that Ashley and the two shareholders own 90% of the Wren;stock after the transfer. Does Ashley have taxable gain on the transfer?;379. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que79;Trudy forms Oak Corporation by transferring land with a basis of $150,000 (fair;market value of $800,000), subject to a mortgage of $450,000. Two weeks prior;to incorporating Oak, Trudy borrows $10,000 for personal purposes and gives the;lender a second mortgage on the land. Oak Corporation issues stock worth;$340,000 to Trudy and assumes the two mortgages on the land. What are the tax;consequences to Trudy and to Oak Corporation?;380. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que80;Nancy, Guy, and Rod form Goldfinch Corporation with the following;consideration.;Adjusted;Fair Market;Basis;Value;From Nancy?;Cash;$120,000;$120,000;Inventory;90,000;130,000;From Guy?;Land and building;120,000;250,000;From Rod?;Legal and accounting services to;incorporate;?0?;50,000;Goldfinch issues its 500 shares of stock as follows: 250 to Nancy, 200 to Guy;and 50 to Rod. In addition, Guy gets $50,000 in cash.;a.;Does Nancy;Guy, or Rod recognize gain (or income)?;b.;What basis;does Guy have in the Goldfinch stock?;c.;What basis;does Goldfinch Corporation have in the inventory? In the land and building?;d.;What basis;does Rod have in the Goldfinch stock?;381. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que81;Sean, a sole proprietor, is engaged in a service business and uses the cash;basis of accounting. In the current year, Sean incorporates his business by;forming Aqua Corporation. In exchange for all of its stock, Aqua receives;assets (basis of $400,000 and fair market value of $2 million), trade accounts;payable of $110,000, and loan due to a bank of $390,000. The proceeds from the;bank loan were used by Sean to provide operating funds for the business. Aqua;Corporation assumes all of the liabilities transferred to it.;a.;Does Sean;recognize any gain on the incorporation? Explain.;b.;What basis;does Sean have in the Aqua stock?;c.;What basis;does Aqua Corporation have in the assets it receives?;382. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que82;Barry and Irv form Swift Corporation. Barry transfers cash of $100,000 and;equipment (basis of $300,000 and fair market value of $400,000) for 50% of;Swift?s stock. Irv transfers land and building (basis of $510,000 and fair;market value of $450,000) and agrees to manage the business for one year for;the other 50% of Swift?s stock. The value of Irv?s services for one year is;$50,000.;a.;What is;Barry?s recognized gain? Basis in the Swift Corporation stock?;b.;What are the;tax consequences to Irv?;c.;What are the;tax consequences to Swift Corporation?;383. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que83;In order to encourage the development of its industrial park, Union County;gives Darter Corporation land (fair market value of $800,000) and cash of;$500,000. Within one year, Darter constructs a new plant at the site at a cost;of $1,200,000.;a.;How much;income, if any, must Darter Corporation recognize as a result of these;transfers?;b.;What basis;will Darter Corporation have in the land? In the plant?;384. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que84;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?;385. CHAPTER;4?CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE Que85;Stock in Merlin Corporation is held equally by Jane, Eve, and Fred. Merlin;seeks additional capital to buy a valuable tract of land that will cost;$6,000,000. Jane, Eve, and Fred propose to loan Merlin $2,000,000 each, taking;from Merlin a $2,000,000 ten-year note with interest payable annually at five;points above the prime rate. Merlin Corporation has current taxable income of;$7,000,000. How are the payments on the notes treated for tax purposes?
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