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Exam 9: Corporations: Organization, capital Structure, and Operating Rules

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Question 81

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In structuring the capitalization of a corporation,the tax law is neutral for the investor as to debt versus equity financing.

A) True
B) False

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Question 82

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Stock in Merlin Corporation is held equally by Jane,Eve,and Fred.Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000.Jane,Eve,and Fred propose to loan Merlin $2,000,000 each,taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate.Merlin Corporation has current taxable income of $7,000,000.How are the payments on the notes treated for tax purposes?

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Payments on the notes will probably be t...

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Question 83

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What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers?

During the current year,Quartz Corporation (a calendar year C corporation)has the following transactions: Quartz owns 25% of ABC Corporation's stock.How much is Quartz Corporation's taxable income (loss)for the year?

Carl and Ben form Eagle Corporation.Carl transfers cash of $50,000 for 50 shares of stock of Eagle.Ben transfers a secret process with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Eagle.Carl will have a tax basis of $50,000 in his stock in Eagle Corporation,but Ben's basis in his stock will be zero.

Earl and Mary form Crow Corporation.Earl transfers property,basis of $200,000 and value of $1,600,000,for 50 shares in Crow Corporation.Mary transfers property,basis of $80,000 and value of $1,480,000,and agrees to serve as manager of Crow for one year; in return Mary receives 50 shares of Crow.The value of Mary's services is $120,000.With respect to the transfers:

Trish and Ron form Pine Corporation.Trish transfers inventory (basis of $60,000 and fair market value of $110,000)for 50% of the stock in Pine.Ron transfers machinery (basis of $20,000 and fair market value of $60,000)and agrees to serve as manager of Pine Corporation for one year for 50% of the stock.What are the tax consequences to Trish,Ron,and Pine Corporation?

Compare the basic tax and nontax factors of doing business as a partnership,an S corporation,and a C corporation.Circle the correct answers.

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel.In the first year of operation,Camel has net taxable income of $70,000.If Camel distributes $50,000 to Adam:

Carl transfers land to Cardinal Corporation for 90% of the stock in Cardinal Corporation worth $20,000 plus a note payable to Carl in the amount of $40,000 and the assumption by Cardinal Corporation of a mortgage on the land in the amount of $100,000.The land,which has a basis to Carl of $70,000,is worth $160,000.