Homer Currently Operates a Successful S Corporation

question 44

Multiple Choice

Homer currently operates a successful S corporation. He would like to bring his two teenage children into the business. If he gives each child 10% of the stock, which of the following statements is true?

• A) Since the children did not pay for the stock, Homer will still be taxed on the full income of the corporation under the assignment of income doctrine.
• B) Homer must receive a reasonable salary for any time he spends working on behalf of the business.
• C) Both statements are true.
• D) Neither statement is true.

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Definitions:

Call Option

A financial contract that gives the holder the right, but not the obligation, to buy a stock, bond, commodity, or other assets at a specified price within a specific time period.

Specified Exercise Price

The predetermined price per share at which the holder of an option can buy (call option) or sell (put option) the underlying security.

Specified Expiration Date

The predetermined date on which an options or futures contract expires, determining the last day it can be exercised or traded.

Bond Equivalent Yield

is a calculation for converting the yield on a short-term, discount-based security into an annual yield that is comparable to those of bonds, to facilitate comparison among various securities.