1. Which of the following is not a characteristic of an S corporation? (Points : 5) Must be formed under state law The transfer of property for stock is always tax-free A shareholder’s share of ordinary income increases his or her stock basis The shareholder never recognizes loss on a nonliquidating distribution 2. What is the effect on the AAA if an S corporation distributes a piece of property valued at $10,000 with a $5,000 basis to 50 percent shareholder and $10,000 cash to the other 50 percent shareholder in a nonliquidating distribution? (Points : 5) $10,000 net increase $5,000 net increase $15,000 net decrease $20,000 net decrease 3. Mary purchased 40 percent of an S corporation on February 28 of the current year and sells a 20 percent interest on November 30. If the corporation reports $10,000 of income for the year, what income does it report on Mary’s Schedule K-1. (Points : 5) $7,534 $3,014 $4,000 $3,184 None of the above 4. The accumulated adjustment account (Points : 5) is a shareholder account. can be reduced below zero by an excess distribution. determines when there is a tax-free distribution during the post-termination period. is important in applying loss limitation rules. 5. Which of the following does not affect the basis of S corporation stock? (Points : 5) Tax-exempt income Nondeductible expenses Charitable contributions Capital gains All affect stock basis 6. Greg and Samantha plan to establish a business in which they will both materially participate. They are both in the 35% marginal tax bracket. Although they expect the business to be very successful in the long-run, they project losses of approximately $100,000 for each of the first five years. Due to potential environmental concerns, limited liability is very important for the owners. Which form of business entity should they select considering both tax and nontax factors? (Points : 5) General partnership C corporation S corporation It makes no difference; any of the above should satisfy Greg and Samantha.