Question 1 [1] Upon the initial formation of a C corporation, which formation qualifies as tax-free under IRC section 351, the basis that a shareholder has in the stock that the shareholder receives in exchange for the property the shareholder contributed to the corporation is described as: a. carryover basis b. adjusted cost basis c. cost basis d. substituted basis 2 points

Question 2 [2] Where individuals contribute qualifying property to a C corporation in exchange for stock (and thus become shareholders of the corporation) and after the transaction the now shareholder(s) control 80%, or more of the vote and value of the company's stock then: a. the shareholders must follow the provisions of IRC section 351 (and associated provisions) and treat the exchange as tax-free (or tax-deferred) which includes substituting the basis the shareholders had in the property they transferred to the corporation as the basis in the stock received. b. the shareholders will review the tax basis in the property they contributed to the company relative to the value of the stock received and, under the rules of IRC section 1001, compute a gain or a loss (or a break-even) result. c. the shareholder may elect to apply the tax-free, or tax-deferred, provisions of IRC section 351 (and associated sections) to avoid any current federal income tax on the transaction. d. the shareholders use the fair market value ("FMV") of the property they received (the stock of the corporation) and that FMV will constitute the tax basis the shareholders have in their stock which they will use to compute gain or loss upon subsequent disposition of the stock. 2 points

Question 3 [3] In potential redemptions under IRC section 302, which are tested at the shareholder level, what is the role that IRC section 318 plays in determining whether the purchase of stock by the corporation from the shareholder should be treated as a redemption under IRC section 302? a. IRC section 318 is used to determine if the purchase of the stock by the corporation was, or was not essentially equivalent to a dividend. b. IRC section 318 provides rules concerning whether a substantial contraction of the corporation's business occurred. c. IRC section 318 provides rules concerning whether the shareholder being tested also owns options to purchase stock which would have an effect on whether the purchase of stock by the corporation from the shareholder constituted a substantial disproportionate reduction in the shareholder's ownership of stock in the corporation relative to the other shareholder(s). d. IRC section 318 is used to attribute ownership of shares owned by other shareholders to the shareholder being tested where the shareholder being tested is personally (or familially) related to one or more of the other shareholders, and/or if the shareholder being tested is an owner of an entity (a corporation, partnership, etc.) which entity also owns stock in the corporation. 2 points

Question 4 [4] In order for a non-liquidating distribution made by a C corporation to its shareholders to be treated as a dividend the corporation must: a. make the distribution in cash pursuant to IRC section 61. b. have earnings and profits (or "E&P") as determined under IRC section 312. c. have intended that the distribution constitute income to the shareholders under the adjusted gross income rules of the section 62 of the IRC. d. make such distribution only to common shareholders and not to preferred shareholders under IRC section 301. 2 points

Question 5 [5] Where a C corporation's earnings and profits (or "E&P") for the current year equals $50M, and the corporation's accumulated E&P equals $100M, a dividend distribution declared by the Board of Directors of $10 per share of common stock for the current year to the company's 3M shareholders (resulting in a total dividend of $30M) will: a. all be attributed to the company's accumulated E&P of $100M, resulting in a reduction of the company's accumulated E&P from $100M to $70M. b. be attributed on pro rata basis to the accumulated and current E&P, resulting in a reduction of the company's accumulated E&P from $100M to $80M and a reduction of the company's current E&P from $50M to $40M. c. all be attributed to the company's current year E&P of $50M, resulting in a reduction of the company's current E&P from $50M to $20M. d. be attributed to the company's current E&P and/or the company's accumulated E&P as the company's Board of Directors' choose based on what the Board of Directors believe is in the best interest of the company. 2 points

Question 6 [6] The reference (or one reference) to the "double tax" that applies to C corporations means that if, for a given year, a C corporation earns $100M of taxable income and pays $21M of corporate income tax the shareholders of that corporation will: a. also pay tax on dividends paid by the corporation out of the referenced $100M of taxable income to the extent the corporation has sufficient earnings and profits ("E&P") warranting the classification of such distributions as dividends. b. also pay $21M of tax on dividends paid by the corporation and/or from gains realized and recognized by the shareholders upon the sale of a portion or all of the shares of stock they own in the corporation. c. also pay tax on the corporate earnings of $100M regardless of whether the corporation makes distributions to the shareholders or not. d. also pay tax on the corporate earnings of $100M when the corporation distributes dividends to the shareholders and/or when the corporation redeems the stock owned by the shareholders. 2 points

Question 7 [7] Even if a C corporation's business expense is within the limitation of IRC section 163(j), the IRS will still consider disallowing claimed interest expense if: a. the corporation, which is properly capitalized, is paying interest to a shareholder and, under IRC section 301, the IRS believes the company could have chosen to declare and distribute dividends to the shareholder instead of borrowing money from and paying interest to the shareholder. b. the corporation is paying interest to a foreign bank from which it borrowed money to finance the establishment of a branch office of the corporation in the country where the lending bank is located. c. the corporation is paying interest at an interest rate of 5%, which is more than the interest rate of 4.75% paid by a similarly situated business because paying such a high amount of interest would not constitute an ordinary and necessary business expense under IRC section 162. d. the corporation, which is thinly capitalized, is paying interest to a shareholder (which shareholder owns 100% of the corporation) and the corporation regularly skips making scheduled interest payments if the company loses money or breaks even during the quarter in which the interest payment is due. 2 points

Question 8 [8] A corporation which is organized under the corporate law provisions of Delaware and is, consequently, a "per se" corporation under IRC section 7701, may still avoid corporate level tax in the U.S. if: a. the corporation applies for and is classified as a small business by the federal Small Business Administration. b. the corporation earns less than $10M of gross income for the year in question. c. the corporation qualifies for and elects to be taxed as an S corporation under Subchapter S (IRC sections 1361 et seq.) of the IRC. d. the corporation elects to be taxed as a partnership under Subchapter K (IRC sections 701 et seq.) of the IRC. 2 points

Question 9 [9] In the formation of a corporation that qualifies as a tax-free, or tax deferred transaction under IRC section 351, if the corporation assumes a liability secured by property contributed by a shareholder and the shareholder is individually relieved from the preexisting legal obligation she had to pay the liability then: a. under IRC sections 1221 and 1222 the exchange in question (with the associated debt relief) will constitute a capital gain (assuming the shareholder's basis is less than the fair market value of the asset). b. under IRC section 61(a)(11) the shareholder will recognize income in an amount equal to the relief, or forgiveness of debt. c. under IRC section 351 such debt relief will constitute boot to the shareholder and any built-in-gain associated with the property that she contributed to the corporation will be recognized to the extent of the amount of debt relief (if that amount is less than the built-in-gain). d. Under IRC sections 351 and 357 such debt relief will not constitute income, or boot to the shareholder as long as the shareholder did not have an intent to avoid taxation and the amount of the liability did not exceed the basis of the property contributed. 2 points

Question 10 [10] If XYZ Corporation, a C corporation, purchased 100% of the stock of Sam Stockholder for $5M, and the stockholder was not personally related to any of the other stockholders of the corporation, and also did not own any interest in any entities (corporations, partnerships, trusts, etc.) that owned stock in the corporation then Sam Stockholder would: a. report the $5M payment as return of capital as long as XYZ Corporation had, in accordance with IRC section 312, earnings and profits ("E&P"), considering both current and accumulated E&P, equal to, or in excess of $5M b. report the $5M payment as a redemption of his stock and calculate a gain, a loss or no gain or loss depending upon the basis the shareholder had in his stock. c. report $3M as dividend income if the total E&P of XYZ Corporation (both current and accumulated E&P) equaled $3M. d. report the $5M payment as dividend income to the extent XYZ Corporation had either current, or accumulated earnings and profits ("E&P"). 2 points