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Chapter 18 Corporations: Organization And Capital Structure
Discussion Questions
1. LO.1 In terms of justification and effect, § 351 (transfers to a controlled corporation) and § 1031 (like-kind exchanges) are much alike. Explain.
2. LO.1 Under what circumstances will gain and/or loss be recognized on a § 351 transfer?
3. LO.1 What does “property” include for purposes of § 351?
4. LO.1 Can gain ever be recognized in a § 351 transfer if boot is not received?
Explain.
5. LO.1 Does the receipt of securities in exchange for the transfer of appreciated property to a controlled corporation cause recognition of gain? Explain.
6. LO.1 What is the control requirement of § 351? Describe the effect of the following in satisfying this requirement:
a. A shareholder renders only services to the corporation for stock.
b. A shareholder renders services and transfers property to the corporation for stock.
c. A shareholder has only momentary control after the transfer.
d. A long period of time elapses between the transfers of property by different shareholders.
7. LO.1 Nancy and her daughter, Kathleen, have been working together in a cattery called “The Perfect Cat.” Nancy formed the business in 2001 as a sole proprietorship, and it has been very successful. Assets have a fair market value of $450,000 and a basis of $180,000. On the advice of their tax accountant, Nancy decides to incorporate “The Perfect Cat.” Because of Kathleen’s participation, Nancy would like her to receive shares in the corporation. What are the relevant tax issues?
8. LO.1, 2, 7 Four friends plan to form a corporation for purposes of constructing a shopping center. Charlie will be contributing the land for the project and wants more security than shareholder status provides. He is contemplating two possibilities: receive corporate bonds for his land or take out a mortgage on the land before transferring it to the corporation. Comment on the choices Charlie is considering.
What alternatives can you suggest?
9. LO.1 At a point when Robin Corporation has been in existence for six years, shareholder
Ted transfers real estate (adjusted basis of $20,000 and fair market value of $100,000) to the corporation for additional stock. At the same time, Peggy, the other shareholder, acquires one share of stock for cash. After the two transfers, the percentages of stock ownership are as follows: 79% by Ted and 21% by Peggy.
a. What were the parties trying to accomplish?
b. Will it work? Explain.
10. LO.2 How does the transfer of mortgaged property to a controlled corporation affect the transferor-shareholder’s basis in stock received? Assume that no gain is recognized on the transfer.
11. LO.3 Discuss how each of the following affects the calculation of the basis of stock received by a shareholder in a § 351 transfer:
a. The transfer of a liability to the corporation along with property.
b. Property that has been transferred has built-in losses.
c. The basis in the property transferred to the corporation.
d. The receipt of “other property” (i.e., boot) in addition to stock.
12. LO.3 In a § 351 transfer, Grebe Corporation receives property in exchange for stock. Will Grebe’s holding period for the property be the same as the shareholder’s holding period for the stock? Explain.
13. LO.4 A corporation acquires property as a contribution to capital from a shareholder and from a nonshareholder. Are the rules pertaining to the property’s basis the same? Explain.
14. LO.5 In structuring the capitalization of a corporation, what are the advantages and disadvantages of utilizing debt rather than equity?
15. LO.6 Katie, a single taxpayer, invested $75,000 in the stock of Penguin Corporation, which recently declared bankruptcy. Although distressed over the loss of her investment, Katie is relieved that she can claim a $75,000 ordinary (rather than capital) loss deduction. Comment on Katie’s expectations.
16. LO.6 Under what circumstances, if any, may a shareholder deduct a business bad debt on a loan made to the corporation?
17. LO.1, 7 Keith’s sole proprietorship holds assets that, if sold, would yield a gain of $100,000. It also owns assets that would yield a loss of $30,000. Keith incorporates his business using only the gain assets. Two days later, Keith sells the loss assets to the newly formed corporation. What is Keith trying to accomplish? Will he be successful? Explain.
18. LO.7 Sarah incorporates her small business but does not transfer the machinery and equipment the business uses to the corporation. Subsequently, the machinery and equipment are leased to the corporation for an annual rent. What tax reasons might Sarah have for not transferring the machinery and equipment to the corporation when the business was incorporated?