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Chapter 18 Corporations: Organization And Capital Structure
36. LO.1, 3 Alice and Jane form Osprey Corporation. Alice transfers property, basis of $25,000 and value of $200,000, for 50 shares in Osprey Corporation. Jane transfers property, basis of $50,000 and value of $165,000, and agrees to serve as manager of Osprey for one year; in return, Jane receives 50 shares in Osprey. The value of Jane’s services to Osprey is $35,000.
a. What gain or income do Alice and Jane recognize on the exchange?
b. What is Osprey Corporation’s basis in the property transferred by Alice and
Jane? How does Osprey treat the value of the services that Jane renders?
37. LO.1, 3 Assume in Problem 36 that Jane receives the 50 shares of Osprey Corporation stock in consideration for the appreciated property and for the provision of accounting services in organizing the corporation. The value of Jane’s services is $35,000.
a. What gain or income does Jane recognize?
b. What is Osprey Corporation’s basis in the property transferred by Jane? How does Osprey treat the value of the services that Jane renders?
38. LO.4 Red Corporation wants to set up a manufacturing facility in a midwestern state. After considerable negotiations with a small town in Ohio, Red accepts the following offer: land (fair market value of $3 million) and cash of $1 million.
a. How much gain or income, if any, must Red Corporation recognize?
b. What basis will Red Corporation have in the land?
c. Within one year of the contribution, Red constructs a building for $800,000 and purchases inventory for $200,000. What basis will Red Corporation have in each of those assets?
39. LO.5, 6 Emily Patrick (36 Paradise Road, Northampton, MA 01060) formed Teal
Corporation a number of years ago with an investment of $200,000 cash, for which she received $20,000 in stock and $180,000 in bonds bearing interest of
8% and maturing in nine years. Several years later Emily lent the corporation an additional $50,000 on open account. In the current year, Teal Corporation becomes insolvent and is declared bankrupt. During the corporation’s existence, Emily was paid an annual salary of $60,000. Write a letter to Emily in which you explain how she would treat her losses for tax purposes.
40. LO.5, 6 Stock in Jaybird Corporation (555 Industry Lane, Pueblo, CO 81001) is held equally by Vera, Wade, and Wes. Jaybird seeks additional capital in the amount of $900,000 to construct a building. Vera, Wade, and Wes each propose to lend Jaybird Corporation $300,000, taking from Jaybird a $300,000 four-year note with interest payable annually at two points below the prime rate. Jaybird Corporation has current taxable income of $2 million. You represent Jaybird Corporation.
Jaybird’s president, Steve Ferguson, asks you how the payments on the notes might be treated for tax purposes. Prepare a letter to Ferguson and a memo for your tax files in which you document your conclusions.
41. LO.6 Sam, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under § 1244 at a cost of $100,000 three years ago.
He sells the stock for $10,000 in the current tax year.
a. How will the loss be treated for tax purposes?
b. Assume instead that Sam sold the stock to his sister, Kara, a few months after it was acquired for $100,000 (its fair market value). If Kara sells the stock for $60,000 in the current year, how should she treat the loss for tax purposes?
42. LO.6 Three years ago and at a cost of $40,000, Paul Sanders acquired stock in a corporation that qualified as a small business corporation under § 1244. A few months after he acquired the stock, when it was still worth $40,000, he gave it to his brother, Mike Sanders. Mike, who is married and files a joint return, sells the stock for $25,000 in the current tax year. Mike asks you, his tax adviser, how the sale will be treated for tax purposes. Prepare a letter to your client and a memo for the file.
Mike’s address is 10 Hunt Wood Drive, Hadley, PA 16130.
43. LO.6 Gigi transfers real estate (basis of $60,000 and fair market value of $40,000) to
Monarch Corporation in exchange for shares of § 1244 stock. (Assume that the transfer qualifies under § 351.)
a. What is the basis of the stock to Gigi? (Gigi and Monarch do not make an election to reduce her stock basis.)
b. What is the basis of the stock to Gigi for purposes of § 1244?
c. If Gigi sells the stock for $38,000 two years later, how will the loss be treated for tax purposes?
44. LO.5, 7 Frank, Cora, and Mitch are equal shareholders in Purple Corporation. The corporation’s assets have a tax basis of $50,000 and a fair market value of $600,000. In the current year, Frank and Cora each loan Purple Corporation $150,000. The notes to Frank and Cora bear interest of 8% per annum. Mitch leases equipment to Purple Corporation for an annual rental of $12,000. Discuss whether the shareholder loans from Frank and Cora might be reclassified as equity. Consider in your discussion whether Purple Corporation has an acceptable debt-equity ratio.