M1 Corporate Formation Flashcards
MCQ-04633
Which of the following forms of business can be formed with only one individual owning the business?
- Sole Proprietorship
- Limited Liability Company
- Partnership
Yes; Yes; No
A sole proprietorship and (in most states) a limited liability company can be formed with only one owner. A partnership requires two or more partners.
MCQ-05976
One of the elections a new corporation must make is its choice of an accounting period. Which of the following entities has the most flexibility in choosing an accounting period?
C Corporation
A C corporation has considerable flexibility in choosing an accounting period. A C corporation generally has the same choice of accounting periods as do individual taxpayers.
MCQ-06534
Which of the following entities must pay taxes for federal income tax purposes?
C Corporation
A C corporation (a regular corporation) must pay federal income tax. A C corporation is not a pass-through entity like the other entities listed
MCQ-08465
Porter, the sole shareholder of Preston Corp., transferred property to the corporation as a contribution to capital. Two years later, Corley transferred property to the corporation in exchange for a 10% interest in corporate stock. The property transferred was valued as follows:
Porter’s transfer Corley’s transfer
Basis $50,000 $250,000
Fair market value 200,000 500,000
What amount represents the corporation’s basis in the property received?
$550,000
Porter’s transfer is not taxable because the 80% control test is met. The corporation’s basis in the property is the basis of $50,000. Corley’s transfer is taxable because the 80% control test is not met. The corporation’s basis in the property is $500,000. The corporation’s total basis in the properties is $550,000 ($50,000 + $500,000).
MCQ-02134
Adams, Beck, and Carr organized Flexo Corp. with authorized voting common stock of $100,000. Adams received 10% of the capital stock in payment for the organizational services that he rendered for the benefit of the newly formed corporation. Adams did not contribute property to Flexo and was under no obligation to be paid by Beck or Carr. Beck and Carr transferred property in exchange for stock as follows:
Adjusted basis Fair Market value % of Flexo stock acq
Beck $5,000 $20,000 20%
Carr 60,000 70,000 70%
What amount of gain did Carr recognize from this transaction?
$0
Carr has no taxable income because he transferred property to Flexo in a transaction that qualifies as nontaxable.
MCQ-02158
In the current year, Stone, a cash basis taxpayer, incorporated her CPA practice. No liabilities were transferred. The following assets were transferred to the corporation:
Cash (checking account) $500
Computer equipment:
Adjusted basis 30,000
Fair market value 34,000
Cost 40,000
Immediately after the transfer, Stone owned 100% of the corporation’s stock. The corporation’s total basis for the transferred assets is:
$30,500
In a corporate formation, the corporation’s basis in the transferred assets is the carryover adjusted basis from the shareholder, $500 + $30,000 = $30,500.
MCQ-06003
In April, X and Y formed Z Corp. X contributed $50,000 cash, and Y contributed land worth $70,000 (with an adjusted basis of $40,000). Y also received $20,000 cash from the corporation. X and Y each receives 50% of the corporation’s stock. What is the tax basis of the land to Z Corp.?
$60,000
There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. X and Y form Z Corporation so that each receives a 50% interest in the corporation. X contributes $50,000 in cash, and Y contributes land worth $70,000 and receives
$20,000 from the corporation [note that each has contributed a net $50,000]. Z Corporation will record the basis of the land at the basis of Y ($40,000) plus any cash it paid to secure the land ($20,000), or $60,000 total basis. Per the above general rule, the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. As there is no indicated debt on the land nor any gain recognized by Y on the transfer [because X and Y
own at least 80% of both the voting and nonvoting stock immediately after the transaction, the basis is the adjusted net book value of Y ($40,000) plus any cash Z Corporation pays for the land ($20,000). [Note that we have not addressed the shareholder consequences in this question.]
MCQ-06518
Quigley, Roberk, and Storm form a corporation. Quigley exchanges $25,000 of legal fees for 30 shares of stock. Roberk exchanges land with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Storm exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?
Quigley Roberk Storm
$25,000 $90,000 $0
IRC Section 351 controls the taxation of transfers to controlled corporations. No gain or loss is recognized to the transferors/shareholders on the property transferred if certain conditions are satisfied. The transaction in this question does not satisfy the conditions of Section 351, and gain or loss can be recognized for each of the shareholders. For Section 351 to apply, the shareholders contributing property, including cash, must own, immediately after the transaction, at least 80% of the voting stock and at least 80% of the nonvoting stock of the corporation. A shareholder who contributes only services (Quigley in this question) is not counted as part of the control group. Thus, only Roberk and Storm are counted, and they together own only 70 shares out of the 100 shares (70%). The $25,000 of legal fees to Quigley is compensation for services rendered and is recognized as income by Quigley. A gain of $90,000 (the fair market value of the land of $100,000 - its adjusted basis of $10,000) is recognized to Roberk. Storm bought shares for cash and has no gain.
MCQ-06015
Ames and Roth form Homerun, a C corporation. Ames contributes several autographed baseballs to Homerun. Ames purchased the baseballs for $500, and they have a total fair market value of $1,000. Roth contributes several autographed baseball bats to Homerun. Roth purchased the bats for
$5,000, and they have a fair market value of $7,000. What is Homerun’s basis in the contributed bats and balls?
$5,500
The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. Applying the information in the fact pattern, there is no “shareholder gain” on this transaction.
Further, there is no indication of any debt being assumed by the corporation. Thus, Homerun’s basis in the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors.
MCQ-08208
The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize?
$6,000
Generally, this is a nontaxable transaction. However, the liabilities assumed by the corporation of $12,000 are in excess of the basis of the property contributed of $6,000. The
amount of the excess, which is $6,000 ($12,000 − $6,000) is a gain that must be recognized. Note that the fact that this is an S Corporation does not affect the answer. The rules for the formation of an S Corporation are the same as for a C Corporation.
MCQ-04758
Dole, the sole owner of Enson Corp., transferred a building to Enson. The building had an adjusted tax basis of $35,000 and a fair market value of $100,000. In exchange for the building, Dole received $40,000 cash and Enson common stock with a fair market value of $60,000. What amount of gain did Dole recognize?
$40,000
As a general rule, a shareholder who contributes property to a corporation in exchange for common stock will not recognize gain or loss if immediately after the transaction when the transferring shareholders (there can be more than one transferor) own at least 80% of the corporation and the shareholder does not receive any boot. In this case, Dole as the sole shareholder owns more than 80% but receives boot, cash of $40,000. Therefore, Dole will recognize gain to the lesser of cash received or realized gain as follows:
Amount realized* $100,000
Adjusted basis** (35,000)
Realized gain 65,000
Recognized gain = Lesser of realized gain ($65,000) or boot received ($40,000)
*Amount realized = Cash $40,000 + Common stock $60,000
** Adjusted basis = the adjusted basis (NBV) of the building = $35,000
Choices “A”, “B”, and “D” are incorrect per the above explanation.
$100,000
$ 65,000
$ 40,000
MCQ-15819
In the current year, Anderson, Branch, and Campbell formed Orange Corp. Anderson transferred to the corporation land with an adjusted basis of $90,000 and a fair market value of $100,000; Branch transferred to the corporation equipment with an adjusted basis of $50,000 and a fair market value of
$100,000; and Campbell will render services to the corporation. Each shareholder received 5,000 shares of Orange Corp. stock, worth a total of $100,000. What amount of income must Campbell report as a result of this transfer?
$100,000
A shareholder receiving common stock in exchange for services provided to the corporation must recognize compensation income equal to the fair market value of the stock received. Campbell received 5,000 shares of stock worth $100,000, so Campbell must report income of $100,000 as a result of the transfer
