Question 1

Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach. Calculate any tax payable by the university, if any, in the first year of his contract.
A)None
B)$210,000
C)$735,000
D)$945,000
E)Some other amount

Accepted Answer

The answer of Nick negotiates a $4.5 million contract per...

Question 2

Saysha is an officer of a local bank that merges with a national bank, resulting in a change of ownership.She loses her job as a result of the merger, but she receives a cash settlement of $390,000 from her employer under her golden parachute.Her average annual compensation for the past five tax years is $110,000.Calculate any nondeductible excise tax Saysha must pay, if any.
A)$0.
B)$56,000.
C)$110,000.
D)$280,000.
E)Some other amount.

Accepted Answer

To calculate the nondeductible excise tax, we need to use the following formula:

Nondeductible Excise Tax = (Cash Payment - Average Annual Compensation) x 20%

Plugging in the numbers given:

Nondeductible Excise Tax = ($390,000 - $110,000) x 20%
Nondeductible Excise Tax = $280,000 x 20%
Nondeductible Excise Tax = $56,000

Therefore, Saysha would have to pay a nondeductible excise tax of $56,000.

Question 3

If the special election under § 83(b) is made as a result of a restricted property transaction, which statement is false?
A)A factor supporting making the § 83(b) election is the expectation the property will appreciate substantially.
B)Ordinary income is recognized on the excess of the FMV over the amount paid for the property on the date received.
C)Any appreciation on the property after receipt is treated as capital gain.
D)A deduction is allowed to the employee for any taxes paid on the original amount included in gross income if the property is subsequently forfeited.
E)None of these is false.

Accepted Answer

The statement that a deduction is allowed to the employee for any taxes paid on the original amount included in gross income if the property is subsequently forfeited is false. No deduction is allowed in this case.

Question 4

Mary establishes a Roth IRA at age 50 and contributes the maximum amount per year to the Roth IRA for 15 years. The account is now worth $199,000, consisting of $75,000 in contributions plus $124,000 in accumulated earnings.How much can Mary withdraw tax-free?
A)$0
B)$75,000
C)$124,000
D)$199,000
E)None of these

Accepted Answer

Mary can withdraw the entire $199,000 tax-free because she is over 59½ and has held the Roth IRA for more than 5 years, meeting the requirements for tax-free qualified distributions.

Question 5

Yvonne exercises incentive stock options (ISOs) for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21, 2019, when the fair market value is $120 per share.She holds the stock for only two years and sells the shares for $115 per share.Determine the recognized gain on the sale and classify it as capital or ordinary.
A)$2,000 ordinary income and $2,000 STCG.
B)$2,000 ordinary income and $2,000 LTCG.
C)$4,000 ordinary income.
D)$1,500 LTCG.
E)None of these.

Accepted Answer

The recognized gain on the sale is $1,500, calculated as the difference between the sale price ($115 per share) and the option price ($100 per share), multiplied by the number of shares (100). Since Yvonne held the stock for more than one year, the gain is classified as long-term capital gain (LTCG).

Question 6

Yvonne exercises incentive stock options (ISOs) for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21, 2019, when the fair market value is $120 per share.She sells the 100 shares of stock 3 1/2 years later for $140.Determine the recognized gain on the sale and classify it as capital or ordinary.
A)$2,000 LTCG.
B)$2,000 ordinary income.
C)$4,000 LTCG.
D)$4,000 ordinary income.
E)None of these.

Accepted Answer

The amount of the gain on the sale is the difference between the selling price of $140 and the cost basis of $100, which is $40 per share. Since Yvonne held the shares for more than a year, the gain is a long-term capital gain (LTCG). Therefore, the recognized gain on the sale is $4,000 (100 shares x $40 per share) and the correct choice is C.

Question 7

The special § 83(b) election (i.e., where income is taxed in the year of the grant) with respect to a restricted stock plan may be advantageous in which of the following situations?
A)The employer is an unstable company.
B)The bargain element is relatively small.
C)A minimum amount of appreciation is expected in the future.
D)The restriction probably will not be satisfied.
E)None of these.

Accepted Answer

If the bargain element is relatively small, electing § 83(b) can be advantageous because the tax paid upfront is minimal, and any future appreciation will be taxed at capital gains rates rather than ordinary income rates.

Question 8

Yvonne exercises incentive stock options (ISOs) for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21, 2019, when the fair market value is $120 per share.She holds the stock for only seven months and sells the shares for $140 per share.Determine the recognized gain on the sale and classify it as capital or ordinary.
A)$2,000 ordinary income and $2,000 STCG.
B)$2,000 ordinary income and $2,000 LTCG.
C)$4,000 ordinary income.
D)$4,000 LTCG.
E)None of these.

Accepted Answer

The recognized gain on the sale is $4,000 ($140 sale price - $100 option price = $40 gain per share x 100 shares). Since Yvonne held the stock for less than a year, the gain is classified as $2,000 ordinary income (the difference between the fair market value at exercise and the option price) and $2,000 short-term capital gain (the difference between the sale price and the fair market value at exercise).

Question 9

Which is not an advantage of a § 401(k) plan over a traditional IRA?
A)Deduction limitation.
B)Early withdrawal option without penalty.
C)Loans from the plan.
D)Record keeping.
E)All of these are advantages of § 401(k) plan.

Accepted Answer

The answer of Which is not an advantage of a...

Question 10

Under a nonqualified stock option (NQSO) plan that is granted to Damon on March 15, 2017, he may purchase 200 shares of stock from his employer at $15 per share.At that date, the option does not have a readily ascertainable fair market value.Eight months later on the date of exercise the fair market value of the stock is $20.On December 1, 2019, Damon sells 100 shares for $24 each.Which of the following would be the result of these transactions on the date of exercise and the date of sale?
A)Ordinary income of $1,000 and a long-term capital gain of $400.
B)Ordinary income of $1,200 and a long-term capital gain of $300.
C)Ordinary income of $2,400 and a long-term capital gain of $0.
D)Ordinary income of $1,000 and a short-term capital gain of $400.
E)None of these.

Accepted Answer

On the date of exercise, Damon recognizes ordinary income equal to the difference between the fair market value of the stock at the time of exercise ($20 per share) and the exercise price ($15 per share). Since he exercises options for 200 shares, the total ordinary income is 200 shares * ($20 - $15) = $1,000. When Damon sells 100 shares for $24 each on December 1, 2019, more than a year after the exercise date, the gain is considered long-term. The capital gain is calculated as the difference between the selling price ($24 per share) and the fair market value at the time of exercise ($20 per share), which was the basis for the shares. Therefore, the capital gain is 100 shares * ($24 - $20) = $400.

Question 11

Jana has $225,000 of earned income in 2019.Calculate the amount she can contribute to a SEP.
A)$22,500
B)$24,500
C)$56,000
D)$56,250
E)None of these

Accepted Answer

Jana can contribute up to 25% of her earned income, up to a maximum of $56,000 in 2019, to a SEP. Therefore, the amount she can contribute is 25% * $225,000 = $56,250. However, since the maximum contribution limit for 2019 is $56,000, that will be the maximum amount she is allowed to contribute.

Question 12

Which statement is true with respect to golden parachute payments?
A)It refers to excess severance pay.
B)It does not include payments from a qualified profit sharing plan.
C)A deduction is denied to the employer.
D)A 20% excise tax is imposed on the recipient.
E)All of these are true.

Accepted Answer

- Golden parachute payments refer to excess severance pay.
- These payments do not include payments from a qualified profit sharing plan.
- A deduction is denied to the employer for these payments.
- A 20% excise tax is imposed on the recipient.

Question 13

James, an executive at Silver, Inc., receives a $600,000 payment under a golden parachute agreement.James's base amount from Silver, Inc., is $140,000.What is the total tax James must pay, assuming a 37% individual tax rate?
A)$0
B)$92,000
C)$222,000
D)$314,000
E)None of these

Accepted Answer

The answer of James, an executive at Silver, Inc., receives...

Question 14

Emmanuel, an executive at Blue Corporation, receives a $600,000 payment under a golden parachute agreement. Emmanuel's base amount from Blue is $140,000.What amount, if any, is deductible by the corporation?
A)$0
B)$140,000
C)$460,000
D)$600,000
E)None of these

Accepted Answer

The answer of Emmanuel, an executive at Blue Corporation, receives...

Question 15

What statement is false with respect to an incentive stock option (ISO)?
A)To qualify as an ISO, the option price must equal or exceed the fair market value of the stock at the time the option is granted.
B)The spread is not subject to the alternative minimum tax.
C)If the employee meets the holding period requirement, the employer does not obtain a business deduction.
D)The spread is the excess of the FMV of the share at the date of exercise over the option price.
E)None of these are false.

Accepted Answer

The spread on an incentive stock option (ISO) is subject to the alternative minimum tax (AMT) if the shares are not sold in the same tax year as the exercise year, making statement B false.

Question 16

Which of the followings is not a characteristic of a Keogh plan?
A)It establishes a trust.
B)It is considered to be a qualified plan.
C)Contribution to plan by extension due date.
D)Favorable 10-year forward averaging is not available.
E)All of these are characteristics.

Accepted Answer

Keogh plans allow for favorable 10-year forward averaging, therefore, this statement is not a characteristic of a Keogh plan. A, B, and C are all characteristics of Keogh plans.

Question 17

Pony, Inc., issues restricted stock to employees in July 2019, with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.It is trading at $10 per share when Sam is issued 1,000 shares, and he proceeds to make a § 83(b) election.At the end of 2019, the stock is selling for $13 per share.Sam remains a full-time employee of Pony for the required two-year vesting period at which time the stock is worth $30 per share.Sam sells his 1,000 shares in 2023 at $36 per share.What amount and type of income will Sam recognize in 2023?
A)$26,000 capital gain.
B)$26,000 ordinary income.
C)$23,000 capital gain.
D)$23,000 ordinary income.
E)$36,000 capital gain.

Accepted Answer

Sam will recognize a $26,000 capital gain in 2023 because he made a § 83(b) election, which means he chose to include the fair market value of the stock at the time of grant ($10,000) in his income for 2019. The sale price in 2023 ($36,000) minus the value at the time of grant ($10,000) equals a $26,000 capital gain.

Question 18

Pony, Inc., issues restricted stock to employees in July 2019, with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.The stock is trading at $10 per share when it is issued.An employee, Sam, decides to make the § 83(b) election with his 1,000 shares.At the end of 2019, the stock is selling for $13 per share.What amount, if any, can Pony take as a compensation deduction?
A)$0.
B)$10,000 in 2019.
C)$13,000 in 2019.
D)$10,000 when stock is sold.
E)$13,000 when stock is sold.

Accepted Answer

Pony, Inc. can take a compensation deduction of $10,000 in 2019, which is the value of the stock at the time it was issued. The § 83(b) election allows the employee to be taxed on the stock at the time of grant rather than at vesting, and correspondingly, the employer gets to take the compensation deduction at the time of the grant.

Question 19

Pony, Inc., issues restricted stock to employees in July 2019, with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.It is trading at $10 per share when Sam is issued 1,000 shares, and he does not make a § 83(b) election.At the end of 2019, the stock is selling for $13 per share.Sam remains a full-time employee of Pony for the required two-year vesting period, at which time the stock is worth $30 per share (in 2021).Sam sells his 1,000 shares in 2023 at $36 per share.What amount and type of income will Sam recognize in 2023?
A)$6,000 ordinary income.
B)$6,000 capital gain.
C)$26,000 capital gain.
D)$6,000 capital gain; $20,000 ordinary income.
E)$20,000 capital gain; $6,000 ordinary income.

Accepted Answer

In 2023, Sam will recognize a $6,000 capital gain, which is the difference between the sale price ($36,000) and the value of the stock when it vested ($30,000). Since Sam did not make a § 83(b) election, the stock is taxed as ordinary income at its fair market value when it vests, not when it is sold. The gain realized upon the sale of the stock over its value at vesting is treated as a capital gain.

Question 20

Pony, Inc., issues restricted stock to employees in July 2019, with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.The stock is trading at $10 per share when it is issued.An employee, Sam, decides to make the § 83(b) election with his 1,000 shares.At the end of 2019, the stock is trading at $13 per share.How much income, if any, must Sam recognize in 2019?
A)$-0-.
B)$10,000 capital gain.
C)$10,000 ordinary income.
D)$13,000 capital gain.
E)$13,000 ordinary income.

Accepted Answer

Sam must recognize the fair market value of the restricted stock at the time of issuance, which is $10,000 (1,000 shares x $10 per share). However, by making the § 83(b) election, Sam is electing to recognize this income in the year of issuance rather than waiting until the stock vests. Therefore, Sam must recognize $10,000 of ordinary income in 2019. The increase in the stock price in 2019 is not relevant for determining the income recognition.

Quiz 19: Deferred Compensation

Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach. Calculate any tax payable by the university, if any, in the first year of his contract.

If the special election under § 83(b) is made as a result of a restricted property transaction, which statement is false?

Mary establishes a Roth IRA at age 50 and contributes the maximum amount per year to the Roth IRA for 15 years. The account is now worth $199,000, consisting of $75,000 in contributions plus $124,000 in accumulated earnings.How much can Mary withdraw tax-free?

The special § 83(b) election (i.e., where income is taxed in the year of the grant) with respect to a restricted stock plan may be advantageous in which of the following situations?

Which is not an advantage of a § 401(k) plan over a traditional IRA?

Jana has $225,000 of earned income in 2019.Calculate the amount she can contribute to a SEP.

Which statement is true with respect to golden parachute payments?

James, an executive at Silver, Inc., receives a $600,000 payment under a golden parachute agreement.James's base amount from Silver, Inc., is $140,000.What is the total tax James must pay, assuming a 37% individual tax rate?

Emmanuel, an executive at Blue Corporation, receives a $600,000 payment under a golden parachute agreement. Emmanuel's base amount from Blue is $140,000.What amount, if any, is deductible by the corporation?

What statement is false with respect to an incentive stock option (ISO) ?

Which of the followings is not a characteristic of a Keogh plan?