1. Marci owns 100% of the stock of KINFOLK INC. This corporation has been in existence for a period of years. The corporation has been expanding into new businesses and requires capital. Marci plans on contributing $1 Million to KINFOLK INC. The corporation will make the following entry: Debit Cash for $1 Million and Credit Common Stock Paid In Capital for $1 Million. The corporation will issue no new shares.
Does KINFOLK INC have to recognize gain on this cash infusion? Why or Why not?
How does the transaction affect Marci?
2. The Chapter Two textbook readings discuss Section 351 transfers to corporations.
Say, we have an individual Marci owning a piece of land costing $100,000 some time and now worth $1 Million. An individual Devon has a patent costing $500,000 and worth $2 Million. Marci and Devon plan on transferring these two assets to a newly formed corporation using Section 351. The individuals will then own 100% of the stock of the newly formed corporation (the corporation will issue 1,000 shares to stock total).
Do Marci or Devon recognize any tax gain here on the transfer -- why or why not?
What tax cost does the corporation have in the two assets and why?
How many shares of stock will Marci and Devon own in the corporation?
3. Say, Devon transfers a depreciable asset in a Section 351 exchange. The property had a purchase price of $100,000 and it has a tax cost of $50,000 upon transfer. How does the corporation receiving the property handle depreciation going forward?
4. Philly transfers a patent to a new corporation using Section 351. Philly will own 100% of the stock of the new corporation. The patent has $2.5 Million tax cost and has an estimated $10 Million fair market value. Philly had taken out a loan for developing the patent. The loan gets transferred to the new corporation as part of the transaction. The loan has $3 Million balance.
Does Philly recognize any gain on the transfer -- why or why not? Hint: see CH2 text readings on debt higher than basis under Section 357(c).
What tax cost does the new corporation have in the patent?
What tax cost does Philly have in the patent?
5. You may consider providing some examples of costs we class as organizational and costs we class as start up for the corporation
6. Parent Corporation owns 100% of the stock of a domestic subsidiary (member of affiliated group). The Subsidiary Corporation provides a $50 Million dividend to the Parent. Is this dividend taxable to the parent why or why not?