Taxation

Topic: Corporate Formation and Capital Structure

 

For some of these problems, there is no “right” or “wrong” answer. I am looking for a few sentences on your thought process why you came up with the response you did.

Problem 1:

Part a. Why would an investor taxpayer prefer to own stock rather than bonds in a corporation?

Part b. Why would an investor prefer to own bonds rather than stock in a corporation?

Problem 2:

In 2021, Rob Short incorporated his trucking delivery business. Rob’s only asset that was transferred to the corporation was a truck with an adjusted tax basis of $20,000, and a fair market value of $40,000. Immediately after the transfer, Rob owned 100% of the corporation’s stock. What is the gain on Rob’s transfer of the truck to the corporation in exchange for stock?

Problem 3:

Assume the same facts as Problem 2, except that Rob also financed his truck with a $10,000 loan. On incorporating his trucking delivery business, Rob transferred to the corporation both the truck and the corporation assumed Rob’s loan. Immediately after the transfer, Rob owned 100% of the corporation’s stock.

Part a. Why would the corporation’s assumption of the loan be the same economic equivalent as boot (i.e., as if Rob was paid in cash)?

Part b. What is the gain on Rob’s transfer of the truck to the corporation in exchange for stock and assumption of the loan?