Question 1

All of the following are correct regarding Phantom Stock except:&#10;A)The phantom stock bonus must be paid in cash.&#10;B)The Phantom Stock bonus is taxed as ordinary income.&#10;C)The Phantom Stock bonus is deductible by the employer.&#10;D)There is no compensation reported when a grant of phantom stock is made.

Accepted Answer

Phantom stock bonuses can be paid out in cash or other forms, not just cash. The key feature of phantom stock is that it's a performance-based incentive that mimics owning actual stock without granting equity.

Question 2

Which of the following provides the executive the right to the appreciation in the price of the employer's stock,but not the stock itself.&#10;A)Incentive Stock Option.&#10;B)Nonqualified Stock Option.&#10;C)Stock Appreciation Right.&#10;D)Tatum option.This is a distractor.

Accepted Answer

A Stock Appreciation Right (SAR) provides the executive the right to the appreciation in the price of the employer's stock, but not the stock itself. SARs are often granted with stock options and allow the executive to receive the appreciation in cash or shares of stock, depending on the employer's plan. Incentive Stock Options (ISOs) and Nonqualified Stock Options (NSOs) both provide the executive with the right to purchase the employer's stock at a predetermined price, but not the appreciation in the stock price. Tatum option is not a real option and is a distractor.

Question 3

In the event of an employer bankruptcy,which of the following trusts requires that the trustee suspend payment to the trust beneficiary and hold assets for the employer's general creditors.&#10;A)Endorsement trust.&#10;B)Rabbi trust.&#10;C)Section 83(b)trust.&#10;D)Secular trust.

Accepted Answer

In the event of an employer bankruptcy, a Rabbi trust requires that the trustee suspend payment to the trust beneficiary and hold assets for the employer's general creditors. A Rabbi trust is a type of non-qualified deferred compensation plan that is subject to the claims of the employer's general creditors in the event of bankruptcy or insolvency. Therefore, this trust is designed to provide security for the beneficiaries against the risk of employer insolvency or bankruptcy.

Question 4

Which of the followings is another name for a qualified employee stock purchase plan?&#10;A)Section 83(b)stock purchase plan.&#10;B)Section 144 stock purchase plan.&#10;C)Section 423 stock purchase plan.&#10;D)Section 1244 stock purchase plan.

Accepted Answer

A Section 423 stock purchase plan is another name for a qualified employee stock purchase plan. Section 83(b) relates to taxation of property transfers, Section 144 relates to exempting securities transactions from certain statutes, and Section 1244 relates to tax treatment of losses on small business stock.

Question 5

An unsecured promise of a future benefit is:&#10;A)Endorsement split dollar.&#10;B)Non-qualified deferred compensation.&#10;C)Restricted stock.&#10;D)Section 83(b)election.

Accepted Answer

Non-qualified deferred compensation involves a promise from an employer to pay an employee a benefit in the future, without any assets being set aside as collateral for that promise. This makes it an unsecured promise of a future benefit. The other options listed involve some level of security or restriction on the benefit.

Question 6

A Section _____ election allows the executive to elect to have the compensation taxed as ordinary income based on the value of the stock when it was granted,rather than when it ____.&#10;A)83(b)/ sells.&#10;B)83(b)/ vests.&#10;C)1244 / sells.&#10;D)1244 / vests.

Accepted Answer

Section 83(b) election allows the executive to elect to have the compensation taxed as ordinary income based on the value of the stock when it was granted, rather than when it vests.

Question 7

Restricted stock is nontransferable and must be traded in compliance with:&#10;A)SEC Rule 144.&#10;B)SEC Rule 1244.&#10;C)Section 83(b).&#10;D)Section 162.

Accepted Answer

Restricted stock can only be traded in compliance with SEC Rule 144, which governs the resale of restricted and controlled securities. SEC Rule 1244 pertains to the treatment of loss from the sale of small business stock, while Section 83(b) relates to the tax treatment of property transferred in connection with the performance of services. Section 162 pertains to business expenses as deductions for tax purposes.

Question 8

An employer-provided vehicle is often made available for personal use by an executive.The personal use represents additional compensation to the executive.The personal use is treated as a taxable fringe benefit and is included as additional compensation on the executive's Form ____.

A)1099-Misc.
B)1099-R.
C)K-1.
D)W-2.

Accepted Answer

The personal use of an employer-provided vehicle is treated as a taxable fringe benefit and is included as additional compensation on the executive's W-2 form. It is not reported on a 1099-Misc, 1099-R, or K-1 form.

Deck 21: Applications in Executive Compensation Planning