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Exam 2: Corporate Formations and Capital Structure

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Question 111

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A medical doctor incorporates her medical practice, which is operated as a sole proprietorship. The proprietorship uses the cash method of accounting. Among the assets contributed to the new corporation are unrealized receivables worth $40,000. The receivables are collected by the corporation. Which of the following statements is correct?

A) The $40,000 of receivables is included as ordinary income in the corporation's income tax return when collected.
B) The $40,000 of receivables is included as ordinary income on the doctor's personal income tax return when collected by the corporation.
C) The $40,000 of receivables is included as ordinary income in the corporation's income tax return at the time of incorporation.
D) The doctor must include the $40,000 as ordinary income in her personal income tax return at the time of incorporation.

E) C) and D)
F) None of the above

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Question 112

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A foreign corporation with a single class of stock is owned 8% by Bert, 49% by Xi Yong, 30% by Ernie, and 13% by Mark. Bert, Ernie, and Mark are U.S. citizens, and Xi Yong is a nonresident alien. The shareholders are not related. Is the foreign corporation a controlled foreign corporation (CFC)?

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It is not a CFC (only 43% owne...

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Question 113

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Identify which of the following statements is false.

What is the branch profits tax? Explain the Congressional intent behind its enactment.

Tanicia owns all 100 shares of Midwest Corporation's stock, valued at $100,000. Gwen owns property that has a $15,000 adjusted basis and a $100,000 FMV. Gwen contributes the property to Midwest Corporation in exchange for 100 shares of newly issued Midwest stock. Does Sec. 351 apply to Gwen's exchange? What is the amount of her realized gain or loss? How much is recognized?

Perry, a U.S. citizen, is transferred by his employer to Japan for a three- year assignment. Which one of the following items is not excluded under Sec. 911?

This year, John, Meg, and Karen form Frost Corporation. John contributes land purchased as an investment four years ago for $25,000 that has a $30,000 FMV in exchange for 30 shares of Frost stock. Meg contributes machinery (Sec. 1251 property) purchased four years ago and used in her business having a $50,000 adjusted basis and a $30,000 FMV in exchange for 30 shares of Frost stock. Karen contributes services worth $15,000 and $5,000 cash in exchange for 20 shares of Frost stock. a) What is the amount of John's recognized gain or loss? b) What is John's basis in his Frost shares? When does his holding period begin? c) What is the amount of Meg's recognized gain or loss? d) What is Meg's basis in her Frost shares? When does her holding period begin? e) How much income, if any, must Karen recognize? f) What is Karen's basis in her Frost shares? When does her holding period begin? g) What is Frost Corporation's basis in the land and the machinery? When does its holding period begin? How Frost Corporation treat the amount paid to Karen for services?