10. Which of the following statements is incorrect?

A) S corporations must allocate income and expenses to their shareholders based on their proportionate ownership interest.

B) S corporation income is taxed to shareholders when earned.

C) S corporation losses can offset shareholder income from other sources.

D) The number of S corporation shareholders is unlimited.

11. Identify which of the following statements is true.

A) The exchange of stock for services rendered is not a taxable transaction.

B) Section 351 was enacted to allow taxpayers to incorporate without incurring adverse tax consequences.

C) The repeal of Sec. 351 would result in more existing businesses being incorporated.

D) All of the above are false.

12. Diego and Justina form a new corporation. Diego contributes cash for 85% of the stock and Justina contributes services for 15% of the stock. The tax effect is

A) Diego and Justina must recognize their realized gains, if any.

B) Justina must report the FMV of the stock received as capital gain.

C) Justina must report the FMV of the stock received as ordinary income.

D) Diego and Justina are not required to recognize their realized gains.