WGU D557 – Corporation Taxation Actual Exam
2026/2027: Complete Exam-Style Questions with
Detailed Rationales | 100% Verified | Pass Guaranteed
– A+ Graded
TABLE OF CONTENTS
Section 1 | C Corporation Formation and Capital Structure | Q1 – Q10
Section 2 | Corporate Income and Deductions | Q11 – Q20
Section 3 | Distributions to Shareholders | Q21 – Q30
Section 4 | S Corporation Eligibility and Taxation | Q31 – Q40
Section 5 | Corporate Liquidations, Reorganizations, and Tax Planning | Q41 – Q50
Instructions: Choose the single best answer. Pass: 80% in 90 minutes.
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SECTION 1: C CORPORATION FORMATION AND CAPITAL STRUCTURE Q1 – Q10
══════════════════════════════════════
Question 1 of 50
Two individuals form a C corporation. One contributes property with a fair market value
of $200,000 and an adjusted basis of $120,000. The property is subject to a mortgage
of $150,000 that the corporation assumes. The other individual contributes cash of
$100,000. What gain must the first shareholder recognize on the transfer?
A. $0 because the transfer qualifies for nonrecognition under §351
B. $30,000 because the liability assumed exceeds the basis of the property ✓ CORRECT
C. $50,000 because the entire mortgage is treated as boot received
D. $80,000 because the realized gain must be fully recognized
Correct Answer: B
Rationale: Section 357(c) requires a shareholder to recognize gain when liabilities
assumed by the corporation exceed the basis of the contributed property, and the
,recognized gain is limited to that excess amount. The $30,000 excess is the correct
amount, not the full liability or the entire realized gain. This prevents shareholders from
pulling out tax-free cash disguised as debt relief in excess of their investment.
Question 2 of 50
A calendar-year C corporation incurs $52,000 in organizational expenditures, including
legal fees for drafting the charter and state incorporation fees. The corporation begins
business on July 1 and has a 6-month short tax year. How much may the corporation
deduct in its first tax year?
A. $5,000
B. $6,267
C. $4,633 ✓ CORRECT
D. $52,000
Correct Answer: C
Rationale: The $5,000 immediate expense is reduced dollar-for-dollar when
organizational costs exceed $50,000, leaving $3,000 to expense immediately, and the
remaining $49,000 is amortized over 180 months beginning in the month business
starts. For a 6-month short year, the amortization is $49,000 divided by 180 and
multiplied by 6, or $1,633, for a total first-year deduction of $4,633. Choice A ignores the
phase-out rule that applies once costs exceed $50,000, and choice B incorrectly applies
a full 12-month amortization to a short tax year.
Question 3 of 50
A single taxpayer invests $80,000 to acquire stock in a small business corporation that
qualifies under §1244. Five years later, the taxpayer sells the stock for $20,000. How is
the $60,000 loss treated for tax purposes?
A. $50,000 ordinary loss and $10,000 capital loss ✓ CORRECT
,B. $60,000 capital loss
C. $60,000 ordinary loss
D. $3,000 ordinary loss and $57,000 capital loss carried forward
Correct Answer: A
Rationale: Section 1244 allows an individual shareholder to treat up to $50,000 of loss
on qualifying small business stock as an ordinary loss rather than a capital loss. The
$10,000 excess loss retains its character as a capital loss subject to the annual $3,000
limitation against ordinary income. Many students incorrectly assume the entire loss
becomes ordinary or forget the annual cap on capital loss utilization.
Question 4 of 50
A closely held C corporation has a debt-to-equity ratio of 10 to 1. A shareholder
advanced $400,000 to the corporation with no formal note, no stated interest rate, and
no repayment schedule. The corporation has been making annual payments of $32,000
and deducting them as interest. Upon audit, the IRS reclassifies the advance as equity.
What is the tax result?
A. The shareholder must treat the $32,000 annual payments as capital gains
B. The corporation can continue deducting the payments as interest expense
C. The $32,000 payments are reclassified as nondeductible dividend distributions by the
corporation ✓ CORRECT
D. The shareholder's basis in the stock is reduced by the $400,000 advance
Correct Answer: C
Rationale: When debt is reclassified as equity under the thin capitalization rules, interest
payments previously deducted by the corporation are treated as nondeductible dividend
distributions, and the shareholder reports them as dividend income rather than interest
income. The corporation loses its interest deduction, which can significantly increase
taxable income and create unexpected tax liability. The shareholder does not treat these
, payments as capital gain because they are not proceeds from a sale or exchange of the
stock.
Question 5 of 50
A cash basis taxpayer transfers accounts receivable with a face value of $100,000 and
a zero tax basis to a newly formed C corporation in exchange for 100% of the stock.
How does the corporation treat the collection of these receivables?
A. The corporation recognizes no income because the receivables were contributed in a
§351 exchange
B. The corporation takes a $0 basis in the receivables and recognizes $100,000 of
income upon collection ✓ CORRECT
C. The transferor recognizes $100,000 of gain on the transfer
D. The corporation takes a $100,000 basis and recognizes no income
Correct Answer: B
Rationale: When a cash basis taxpayer transfers zero-basis accounts receivable to a
controlled corporation under §351, the corporation assumes the transferor's basis of
zero and recognizes the full face amount as income upon collection. The transferor
does not recognize gain because the transfer qualifies for nonrecognition under §351,
but the built-in income potential carries over to the corporation. This prevents the
transferor from shifting ordinary income to the corporation without tax consequence.
Question 6 of 50
Three investors form a C corporation. Investor A contributes property with a fair market
value of $100,000. Investor B contributes cash of $50,000. Investor C contributes
services valued at $50,000 and receives 25% of the outstanding stock. Investors A and
B receive the remaining shares proportionally. Does §351 apply to the property
transfers?
2026/2027: Complete Exam-Style Questions with
Detailed Rationales | 100% Verified | Pass Guaranteed
– A+ Graded
TABLE OF CONTENTS
Section 1 | C Corporation Formation and Capital Structure | Q1 – Q10
Section 2 | Corporate Income and Deductions | Q11 – Q20
Section 3 | Distributions to Shareholders | Q21 – Q30
Section 4 | S Corporation Eligibility and Taxation | Q31 – Q40
Section 5 | Corporate Liquidations, Reorganizations, and Tax Planning | Q41 – Q50
Instructions: Choose the single best answer. Pass: 80% in 90 minutes.
══════════════════════════════════════
SECTION 1: C CORPORATION FORMATION AND CAPITAL STRUCTURE Q1 – Q10
══════════════════════════════════════
Question 1 of 50
Two individuals form a C corporation. One contributes property with a fair market value
of $200,000 and an adjusted basis of $120,000. The property is subject to a mortgage
of $150,000 that the corporation assumes. The other individual contributes cash of
$100,000. What gain must the first shareholder recognize on the transfer?
A. $0 because the transfer qualifies for nonrecognition under §351
B. $30,000 because the liability assumed exceeds the basis of the property ✓ CORRECT
C. $50,000 because the entire mortgage is treated as boot received
D. $80,000 because the realized gain must be fully recognized
Correct Answer: B
Rationale: Section 357(c) requires a shareholder to recognize gain when liabilities
assumed by the corporation exceed the basis of the contributed property, and the
,recognized gain is limited to that excess amount. The $30,000 excess is the correct
amount, not the full liability or the entire realized gain. This prevents shareholders from
pulling out tax-free cash disguised as debt relief in excess of their investment.
Question 2 of 50
A calendar-year C corporation incurs $52,000 in organizational expenditures, including
legal fees for drafting the charter and state incorporation fees. The corporation begins
business on July 1 and has a 6-month short tax year. How much may the corporation
deduct in its first tax year?
A. $5,000
B. $6,267
C. $4,633 ✓ CORRECT
D. $52,000
Correct Answer: C
Rationale: The $5,000 immediate expense is reduced dollar-for-dollar when
organizational costs exceed $50,000, leaving $3,000 to expense immediately, and the
remaining $49,000 is amortized over 180 months beginning in the month business
starts. For a 6-month short year, the amortization is $49,000 divided by 180 and
multiplied by 6, or $1,633, for a total first-year deduction of $4,633. Choice A ignores the
phase-out rule that applies once costs exceed $50,000, and choice B incorrectly applies
a full 12-month amortization to a short tax year.
Question 3 of 50
A single taxpayer invests $80,000 to acquire stock in a small business corporation that
qualifies under §1244. Five years later, the taxpayer sells the stock for $20,000. How is
the $60,000 loss treated for tax purposes?
A. $50,000 ordinary loss and $10,000 capital loss ✓ CORRECT
,B. $60,000 capital loss
C. $60,000 ordinary loss
D. $3,000 ordinary loss and $57,000 capital loss carried forward
Correct Answer: A
Rationale: Section 1244 allows an individual shareholder to treat up to $50,000 of loss
on qualifying small business stock as an ordinary loss rather than a capital loss. The
$10,000 excess loss retains its character as a capital loss subject to the annual $3,000
limitation against ordinary income. Many students incorrectly assume the entire loss
becomes ordinary or forget the annual cap on capital loss utilization.
Question 4 of 50
A closely held C corporation has a debt-to-equity ratio of 10 to 1. A shareholder
advanced $400,000 to the corporation with no formal note, no stated interest rate, and
no repayment schedule. The corporation has been making annual payments of $32,000
and deducting them as interest. Upon audit, the IRS reclassifies the advance as equity.
What is the tax result?
A. The shareholder must treat the $32,000 annual payments as capital gains
B. The corporation can continue deducting the payments as interest expense
C. The $32,000 payments are reclassified as nondeductible dividend distributions by the
corporation ✓ CORRECT
D. The shareholder's basis in the stock is reduced by the $400,000 advance
Correct Answer: C
Rationale: When debt is reclassified as equity under the thin capitalization rules, interest
payments previously deducted by the corporation are treated as nondeductible dividend
distributions, and the shareholder reports them as dividend income rather than interest
income. The corporation loses its interest deduction, which can significantly increase
taxable income and create unexpected tax liability. The shareholder does not treat these
, payments as capital gain because they are not proceeds from a sale or exchange of the
stock.
Question 5 of 50
A cash basis taxpayer transfers accounts receivable with a face value of $100,000 and
a zero tax basis to a newly formed C corporation in exchange for 100% of the stock.
How does the corporation treat the collection of these receivables?
A. The corporation recognizes no income because the receivables were contributed in a
§351 exchange
B. The corporation takes a $0 basis in the receivables and recognizes $100,000 of
income upon collection ✓ CORRECT
C. The transferor recognizes $100,000 of gain on the transfer
D. The corporation takes a $100,000 basis and recognizes no income
Correct Answer: B
Rationale: When a cash basis taxpayer transfers zero-basis accounts receivable to a
controlled corporation under §351, the corporation assumes the transferor's basis of
zero and recognizes the full face amount as income upon collection. The transferor
does not recognize gain because the transfer qualifies for nonrecognition under §351,
but the built-in income potential carries over to the corporation. This prevents the
transferor from shifting ordinary income to the corporation without tax consequence.
Question 6 of 50
Three investors form a C corporation. Investor A contributes property with a fair market
value of $100,000. Investor B contributes cash of $50,000. Investor C contributes
services valued at $50,000 and receives 25% of the outstanding stock. Investors A and
B receive the remaining shares proportionally. Does §351 apply to the property
transfers?
