1. The three Crosby children intend to form a business. The business will borrow $900,000 from a local bank. Which of the following statements is true?

A. Regardless of whether the business is a partnership or an S corporation, the owners will include the bank debt in the tax basis of their ownership interests.

B. From a liability standpoint, the owners should be indifferent as to whether they are a general partnership or an S corporation.

C. If the business is an S corporation, the owners can allocate income and losses in any reasonable manner.

D. If the business is a partnership the owners can allocate income and losses in any reasonable manner.

2. Which of the following would not be a successful means of avoiding double tax on the earnings of a closely-held corporation?

A. Having a shareholder lend money to the corporation at a reasonable rate of interest.

B. Having a shareholder lease warehouse space to the corporation at a reasonable rental rate.

C. Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns.

D. Having the corporation employ the shareholder at a reasonable compensation.

3. Which of the following items might an IRS agent seek to re characterize as a constructive dividend?

A. Payment of interest expense to a corporate shareholder, where the loan bears interest at a market rate, has fixed written terms with a repayment required at a defined future point, and the corporation is not

thinly capitalized.

B. Payment of salary expense to a corporate shareholder's wife, where the wife performs no services for the corporation.

C. Payment of rental expense to a corporate shareholder, for the use of equipment owned by the shareholder. The equipment is necessary to the corporate business, and the rental cost is similar to that charged by unrelated equipment providers.

D. All of the above payments could reasonably be considered constructive dividends.

4. Which of the following is NOT one of the characteristics of a constructive dividend?

A. Payment between a corporation and a shareholder

B. Original payment treated as deductible by the corporation

C. Original payment treated as made to the shareholder in some capacity other than as an owner of the corporation

D. All of the above are common characteristics of constructive dividends.

5. Cathy is the President and sole shareholder of Boxer, Inc., a regular corporation. The corporation reported taxable income of $435,000 after deducting Cathy's $800,000 salary. If the IRS disallowed $550,000 of the salary as unreasonable compensation, the corporation's regular income tax will change by a:

A. $187,000 increase

B. $175,000 increase

C. $175,000 decrease

D. $187,000 decrease