1. A contributes to X, a newly formed corporation, property worth $80 with a basis of $60 in exchange for 20 shares. Assume the stock is worth $1 per share. As part of the same transaction, B contributes to X property worth $20 with a basis of $10 in exchange for 80 shares. How much income must A and B recognize and why (assume that if § 351 applies, A's basis in the stock A receives is the same as A's basis in the property A contributes)?
2. In each of the following scenarios, determine in regards to the exchange with X:
a) A's amount realized
b) A's gain or loss realized
c) A's gain or loss recognized and the character thereof
d) A's basis in the X stock received
e) A's holding period for the X stock received (tacked or not?)
f) X's basis in the property received
g) X's holding period for the property received (tacked or not?)
h) The amount and character of X's gain if X immediately sells the property for $100
And the following in regards to the subsequent sale from A to B:
i) A's gain or loss realized
j) A's gain or loss recognized and the character thereof
k) A's basis in the remaining shares
l) B's basis in the purchased shares from A
Assumptions: Except as otherwise stated, A starts out with non-depreciable real property (a capital asset) worth $100 (adjusted basis $40) and ends up with cash of $50 plus a 50% interest (worth $50) in X, a newly organized corporation that owns the property.
(a) A transfers the property to X in exchange for all of X's stock. Shortly thereafter, A sells half of his X stock to B for $50. The stock sale is a "separate" event from the prior incorporation transaction.
(b) Same as (a), except the stock sale is an integral part of the incorporation plan.
3. L has business assets worth $8 million and NOL carryovers of $1 million expiring in 14 years and of $2 million expiring in 15 years. 100% of L's stock is worth $10 million. The long-term tax exempt rate is 8 percent. The current third party market interest rate is 10 percent. Commercial bank mortgage rates are 12%.
(a) What will the § 382 limitation be if an ownership change occurs with respect to L's stock? Assuming sufficient taxable income, how long will it take to fully utilize the NOLs?
(b) Same questions and facts as (a) above, except L has minimal assets and 100% of its stock is worth $1 million.
4. X has 10 shareholders, each of whom owns 100 of its 1,000 outstanding shares of common stock (worth $100 per share). No other stock is outstanding. Determine whether the securities described in the situations below are debt or equity of X (support your answer with citations as necessary).
(a) X issues a secured standard form note to the bank promising unconditionally to repay in five years $1 million borrowed, plus interest at the bank's prime rate plus one percent.
(b) X issues to the public for cash $1 million worth of "pure preferred" stock (nonvoting, nonparticipating, nonconvertible), callable in five years at par, paying an 18% cumulative dividend.
(c) In return for a transfer of $1 million, X issues an unsecured promissory note for $1 million to Mr. Jones, a well-known local venture capitalist, payable in 10 years with interest keyed to X's profitability. The note is subordinated to all other debt. X could not have borrowed this amount on these terms from a bank.
5. A owns all of the stock of X. The stock's basis is $100. X has a total of current and accumulated earnings and profits of $50. X distributes $200 cash to A "with respect to his stock" (i.e., as a state law "dividend"). How is the $200 taxed and what is A's stock basis after the distribution?
6. What are the two primary tax-motivated reasons why a shareholder would prefer exchange treatment over dividend treatment? Your answer should be based on class discussions and you may assume special tax rates on qualified dividend income are not in effect.
7. X is owned entirely by two individuals, A and B (who are unrelated unless otherwise stated). A owns 60 shares of X common stock (purchased in one transaction for $600). B owns 40 shares of X common stock (with a basis of $30 per share). The stock's FMV is $20 per share. X's E&P is $500. X uses the accrual method of accounting. What are the results to the parties from the alternative transactions shown below (i.e., the amount and character of shareholder income or loss and the E&P impact)?
(a) A sells 10 X shares to B for $200 (A's basis in his X shares is ratable).
(b) A sells 30 shares back to X for $600.
(c) A sells 20 shares back to X for $400.
(d) What would result to B if X redeems 10 of B's shares for $200? What is the minimum number of shares that B must have redeemed to ensure sale or exchange treatment? Explain.
8. A owns all of the X stock with a basis of $200. A's three sons own all of the Y stock equally. X and Y each have E&P of $100, respectively. A sells one half of the X stock to Y for $200.
(a) What is the amount and character of income or loss to A on this transaction?
(b) Would your answer change if X, rather than A's three sons, owned all of the stock of Y?