Part I
Indicate whether each statement is true or false.
1. Code Sec. 351 only applies to the organization of a corporation, not to transfers to an already existing corporation.
2. Individual A, an accountant, receives 50 shares of stock for services in connection with the organization of X corporation. Individual A has ordinary income to the extent of fair market value of the 50 shares.
3. Corporate distributions are dividends only if there are sufficient current earnings and profits.
4. A shareholder's basis in property distributed from a corporation is the basis of the corporation in such property.
5. A distributing corporation may be required to recognize gain on the distribution of property to a shareholder.
6. The dividend received deduction allowed to a corporation owning 20% of another corporation is 70%.
7. All organizational expenses must be amortized ratably over the 180 month period beginning with the month the corporation begins business.
8. The charitable contribution deduction for a corporation is limited to 10% of taxable income after the DRD and any net operating loss carryback.
9. A corporation deducts capital losses for the current year against its capital gains and any excess is deductible up to $3,000.
10. The assumption of a liability by the corporation in a Section 351 transaction is not considered boot.
11. The repayment of the face amount of a debt instrument is nontaxable to the holder of the debt.
12. Dividend distributions by a corporation to its shareholders are deductible to the corporation to the extent of its earnings and profits.
13. Pursuant to Section 166, an ordinary loss deduction is allowed to non-corporate lenders for non-business bad debts.
14. Upon a redemption by a corporation of shares, the shareholder may be accorded sale or exchange treatment.
15. Section 318 family attribution requires, among other things, brother/sister attribution.
16. The waiver of family attribution rules is available for all testing purposes under Section 302(b).
17. A distribution under Section 301 is first a taxable dividend to the extent of current or accumulated earnings and profits, then a return of capital and any excess is a capital gain.
18. Apartnership is an eligible shareholder of an S Corporation as long as all partners are individuals.
19. A calendar year corporation electing to be an S Corporation must do so by filing the proper form with the IRS on or before the 15th day of the 4th month of the corporation's tax year.
20. An S Corporation shareholder is prohibited from including any loans made by the shareholder in Its stock basis.
Part II
Indicate the best answer for each of the following items.
Note: Items 1 through 9 are based on the following information:
A, B, C and D all individuals form Deli Corporation by transferring the following:
A: Cash $30,000 and equipment with value of $40,000 with a basis to A of $30,000. Individual A receives $70,000 worth of stock.
B: Land with value of $60,000 with a basis to B of $50,000 and a mortgage of $30,000 to be assumed by Deli Corporation. B receives $30,000 worth of stock.
C: Building with value of $50,000 with a basis to C of $45,000. C receives $40,000 worth of stock plus $5,000 of cash and $5,000 of other property.
D: Transfers personal services of $6,000 and receives $6,000 worth of stock.
1. How much gain or loss is recognized by A?
a. -0-
b. $10,000 loss
c. $10,000 gain
d. $20,000 gain
2. What basis will Deli Corporation have in the equipment?
a. $10,000
b. $20,000
c. $30,000
d. $40,000
3. How much gain or loss is recognized by B?
a. -0-
b. $10,000 gain
c. $20,000 gain
d. $30,000 gain
4. What basis will Deli Corporation have in the land?
a. -0-
b. $30,000
c. $50,000
d. $60,000
5. How much gain or loss is recognized by C?
a. -0-
b. $5,000 loss
c. $5,000 gain
d. $10,000 gain
6. What basis will C have in Deli Corporation stock?
a. $30,000
b. $40,000
c. $47,000
d. $50,000
7. What basis will Deli Corporation have on the building?
a. $30,000
b. $45,000
c. $47,000
d. $50,000
8. How much income, if any, must D recognize?
a. -0-
b. $600
c. $6,000
d. $6,600
9. What basis will D have in Deli Corporation stock?
a. -0-
b. $600
c. $6,000
d. $6,600
10. Deli Corporation began business operations on July 1, 2011 and has a calendar year end. Organization costs of $12,200 were incurred. What is the amount of organization expense that can be deducted on its December 31, 2011 tax return?
a. -0-
b. $5,000
c. $5,200
d. $5,240
11. A, B and C form ABC Corporation by transferring the following:
A: $40,000 of equipment, receives $40,000 of stock
B: $38,000 of land, receives $38,000 of stock
C: $22,000 of services, receives $22,000 of stock
Does the above transfer qualify A and B for non-recognition of gain or loss under Code Sec. 351?
a. Yes
b. No
12. Deli Corporation's earnings and profits for 2011, its first year of operations, were $60,000. In December it distributed to its individual shareholder A land with a basis of $20,000 and fair market value of $50,000. What is the amount of the distribution that will be taxed as a dividend to the shareholder?
a. -0-
b. $20,000
c. $50,000
d. $60,000
13. Deli Corporation's accumulated earnings and profits at January 1, 2011 were a deficit of ($50,000) and its 2011 current earnings and profits are $60,000. In December 2011 it distributed to its individual shareholder A cash of $75,000. Prior to the distribution, A's basis in Deli Corporation was $10,000. What capital gain results to A on the distribution?
a. -0-
b. $5,000
c. $10,000
d. $15,000
14. Deli Corporation distributes property with a basis of $100,000 and a fair market value of $70,000 to its sole shareholder A. What recognized loss does Deli Corporation have as a result of the distribution?
a. -0-
b. $30,000
c. $70,000
d. $100,000
15. An example of an adjustment to a corporation's taxable income in calculating earnings and profits is:
a. Tax exempt interest
b. Excess capital losses
c. Both a and b
d. None of the above
16. A owns 60 shares and B owns 40 shares of the voting stock of X Corporation. A sells 24 shares back to the corporation. What is the result to A?
a. Not a taxable transaction.
b. A has dividend income (to the extent of earnings and profits)
c. A has sale or exchange treatment
d. None of the above
17. C Corporation converts to S status on January 1, 2011 and has an asset with basis of $40,000 and fair market value of $85,000 at conversion. The asset is sold during 2011 for $95,000. What is the recognized gain subject to the built-in gains tax?
a. $55,000
b. $45,000
c. $10,000
d. -0-
18. Which of the following will not prevent a corporation from qualifying for the special tax rules under Subchapter S?
a. Corporation has more than 100 shareholders.
b. A nonresident alien owns shares in the corporations.
c. Corporation has two classes of stock: common and preferred
d. All of the shareholders are individuals and estates
19. A corporation has income of $62,000 from operations and a long term capital loss of $5,000 and long term capital gain of $4,000. What is the corporation's taxable income?
a. $62,000
b. $57,000
c. $66,000
d. $61,000
20. C Corporation needs to raise capital and is uncertain whether to issue debt or equity. Which of the following statement is true?
a. Interest and dividends are deductible expenses.
b. Interest is deductible, but dividends are not deductible unless there is enough E&P.
c. The shareholders (corporate and non-corporate) are indifferent as to whether they receive interest or dividends.
d. None of the above is true.
Part III:
1. Two individuals, A and B want to form a new business venture, invest $5,000 each in it, and raise additional capital of $10 million from either a handful or thousands of investors. Discuss the C Corporation and S Corporation alternatives for taxing the business income that might be earned by such venture. Which of these requires the business entity to pay tax on the income earned by the business? Which of these requires the entity's owners to pay tax on the income earned by the entity? Discuss and consider tax rates, distributions, operating losses and A and B shareholder loans under each alternative.
2. C and D organize a Delaware Corporation for their business, but continue to operate the business under its pre-incorporation name, "C&D Enterprises," continue to use the pre-incorporation bank account, make contracts for the incorporated business in their own names as individuals, and generally ignore the incorporation except for depositing receipts in a corporate bank account and paying themselves "salary" (but with no employment contract or board resolution) and filing a corporate income tax return as a C Corporation. Could the IRS assess A and B individually for tax on the "corporate income"? Should it do so? Discuss and analyze the cases of Moline Properties and Roubik (set forth in Bittker, Chapter 1.05(1)(b) and Chapter 1, footnote 65) as they apply to these facts.
3. It is important to determine whether an interest in a corporation is treated as debt or equity. In the absence of black letter law, the courts and the IRS have set forth various evidentiary factors to be considered when classifying debt versus equity. Discuss the various objective factors to be considered and further discuss the various tax consequences to the holder of debt, the holder of stock and the issuing corporation. For example, dividends versus interest payments, taxation upon sale of debt instrument and sale of stock, worthless securities and applicable bad debt deduction treatments.
4. A corporate distribution is includible in a shareholder's gross income to the extent that it is a "dividend." Please set forth the definition of a dividend and discuss the distribution rules as set forth in Code Section 301 with an example. Contrast the Section 301 distribution rules with the redemption rules under Section 302 and provide an example of a redemption under the 50%/80% test of Section 302(b)(2) setting forth the tax consequences to the shareholder of meeting this test and, in the alternative, failing this test.