True or False

1. _____ Cheri is an S corporation shareholder. She contributes $50,000 in cash for her shares in the corporation. She also loans the corporation $20,000. The limit of her basis for absorbing losses is $50,000.

2. _____ Tom and Mary Watson contribute $1,000,000 to a new business venture. Johan, a German citizen, contributes $500,000 and Gliden, Inc., a corporation incorporated in the State of Illinois, contributes another $500,000. These owners will be unable to elect S corporation status for their new business venture.

3. _____ As a general rule, when a person obtains an interest in partnership capital through rendition of services, ordinary income is recognized to the extent of the fair market value of a capital interest received. Generally, a future profits only interest is not taxable.

4. _____ Gina receives a guaranteed payment of $30,000 and a cash withdrawal of $10,000 from a partnership. She must reduce her capital account and the basis of her partnership interest by $40,000.

5. _____ A contribution of appreciated property to a partnership is generally a non-taxable event unless the property is subject to liabilities and the partners net liability relinquishment (liabilities transferred less liabilities assumed) is greater than the partners basis in the transferred property.

6. _____ Bob and Joan incorporate their partnership and elect to be taxed as an S Corporation. At the time of incorporation, the partnership owned securities with a basis of $10,000 and a fair market value of $15,000. Two years later the S Corporation sold the securities for $18,000. The S Corporation will have to pay an entity level tax on the built-in gain of $5,000 that existed at the time of incorporation but the remaining $3,000 of gain will be taxable only at the shareholder level.

7. _____ Tara is the sole shareholder of an S Corporation. Taras salary from the S Corporation is $50,000 and the ordinary income of the S Corporation after deducting all expenses is $25,000. Taras employment income for FICA purposes is $75,000.

8. _____ An S corporation distributes inventory with a basis of $30,000 and a value of $60,000 to its three shareholders who have a total basis of $90,000 in their stock. The corporation recognizes gain on the distribution, the shareholders are taxed on the gain, their bases are increased by the gain recognized, and their bases are reduced by the fair market value of the inventory received.

9. _____ A partnership distributes inventory with a basis of $30,000 and a value of $60,000 to its three partners who have a total basis of $90,000 in their partnership interest. The distribution is non-liquidating. The partnership recognizes gain on the distribution, the partners are taxed on the gain, their bases are increased by the gain recognized, and their bases are reduced by the fair market value of the securities received.

10. _____ A C corporation distributes securities with a basis of $30,000 and a value of $60,000 to its three shareholders who have a total basis of $90,000 in their stock. The distribution is not a redemption of the shareholders stock nor a payment made in liquidation. The corporation recognizes gain on the distribution and is taxed. The shareholders are taxed on dividend income for the value of the securities. The shareholders stock bases are unchanged.