1. The courts have determined that to qualify as a trade or business, an activity must

a. be operated with a profit motive.

b. need not have any taxpayer involvement.

c. show a profit.

d. Both a and b are true.

e. All three statements are true.

2. The crucial reason for determining whether an item is deductible as an expense under 162 or under 212 is that

a. production-of-income expenses are not deductible.

b. 162 business expenses usually are deductions for A.G.I., while 212 production-of-income expenses usually are deductible for A.G.I also.

c. 162 business expenses usually are deductions for A.G.I., while 212 production-of-income expenses usually are not deductible from A.G.I. as miscellaneous itemized deductions.

d. 162 business expenses are deductions from A.G.I., while 212 production-of-income expenses are deductions for A.G.I.

e. it resolves certain ownership questions.

3. Z is a ten-percent (10%) shareholder of H, Inc. H, Inc. has distributable net income of $200,000 this year and no accumulated earnings and profits. Z was paid $25,000 by the company for his expertise as a pilot, but he did not fly this year. How is the IRS likely to view the $25,000?

a. $25,000 salary to Z.

b. $25,000 dividend.

c. $20,000 dividend, $5,000 return of capital and/or capital gain.

d. $12,500 salary, $12,500 dividend.