Accounting 317 – chapter 18

Allie forms Broadbill Corporation by transferring land (basis of $125,000, fair market value of $775,000), which is subject to a mortgage of $375,000. One month prior to incorporating Btroadbill, Allie borrows $100,000 for personal reasons and gives the lender a second mortgage on the land. Broadbill Corporation issues stock worth $300,000 to Allie and assumes the mortgages on the land.

a.   What are the tax consequences to Allie and to Broadbill Corporation?

b.   How would the tax consequences to Allie differ if she had not borrowed the $100,000?

Assume in Problem 34 that Jane receives the 50 shares of Osprey Corporation stock in consideration for the appreciated property and for the provision of accounting services in organizing the corporation. The value of Jane’s services is $35,000.

a.   What gain or income does Jane recognize?

b.   What is Osprey Corporation’s basis in the property transferred by Jane? Hoe does Osprey treat the value of the services that Jane renders?

Dont do number 34. Just use it as a reference for the question above.

(34).  Alice and Jane form Osprey Corp. Alice transfer property, basis of $25,000 and value of $200,000, for 50 shares in Osprey Corp. Jane transfers property, basis of $50,000 and value of $165,000, and agrees to serve as manager of Osprey for one year; in return, Jane receives 50 shares in Osprey. The value of Jane’s services to Osprey is $35,000.

a). What gain or income do Alice and Jane recognize on the exchange?

b). What is Osprey Corp. basis in the property transferred by Alice and Jane? How does Osprey treat the value of the services that Jane renders?)

Red Corporation wants to set up a manufacturing facility in a Midwestern state. After considerable negotiations with a small town in Ohio, Red accepts the following offer: land (fair market value of $3 million) and cash of $1 million.

a.   How much gain or income, if any, must Red Corporation recognize?

b.   What basis will Red Corporation have in the land?

c.   Within one year of the contribution, Red constructs a building for $800,000 and purchases inventory for $200,000. What basis will Red Corporation have in each of those assets?

Sam, a single taxpayer, acquired stock in a corporation that qualified as a small business corporation under x 1244 at a cost of $100,000 three years ago. He sells the stock for $10,000 in the current tax year.

a.   How will the loss be treated for tax purposes?

b.   Assume instead that Sam sold the stock to his sister, Kara, a few months after it was acquired for $100,000 (its fair market value). If Kara sells the stock for $60,000 in the current year, how should she treat the loss for tax purposes?

Frank, Cora, and Mitch are equal shareholders in Purple Corporation. The corporation’s assets have a tax basis of $50,000 and a fair market value of $600,000. In the current year, Frank and Cora each loan Purple Corporation $150,000. The notes to Frank and Cora bear interest of 8% per annum. Mitch leases equipment to Purple Corporation for an annual rental of $12,000. Discuss whether the shareholder loans from Frank and Cora might be reclassified as equity. Consider in your discussion whether Purple Corporation has an acceptable debt-equity ratio.