Deck 18: Employee Compensation and Retirement Plans

Question 1

An employer with a qualified defined contribution (profit sharing) plan is required to make an annual contribution to the plan.

Answer 1

False

Question 2

A taxpayer who is 60 years old on retirement in the current year may use the special forward averaging method of computing his or her income tax on a lump sum distribution from a qualified plan only once.

Answer 2

True

Question 3

A self-employed taxpayer is limited only by the amount of his or her earned income in determining the maximum annual contribution to a defined contribution Keogh plan.

Answer 3

False

Question 4

Only corporate employers may have qualified retirement plans for their employees.

Question 5

The value of an annual employer-sponsored Christmas party may be excluded from an employee's gross income because it is a de minimis fringe benefit.

Question 6

In 2010, M corporation transferred 1000 shares of its common stock worth $90,000 to Y, an employee, in connection with her performance of services for the corporation.The shares, however, are subject to substantial restriction: Y will have to forfeit the shares if she leaves M corporation before 2013.Y makes a § 83(b) election to include the $90,000 value of the shares in her 2010 income.In 2013 Y is still working for M corporation and her 1,000 shares are worth $230,000.Y realizes $140,000 of taxable income on her 2013 return.

Question 7

In order for a retirement plan to be "qualified," retirement benefits must vest immediately in participating employees.

Question 8

Stock options are always taxed as income to the recipient on the day they are granted.

Question 9

If the value of a noncash fringe benefit is not specifically excluded from gross income by statutory law, it must be included in the recipient's gross income.

Question 10

The employee who exercises an ISO creates a deduction for his employer at that time equal to the difference between the option price and the market price.

Question 11

Taxpayer A, a dentist, fills a cavity for Taxpayer B, an attorney, in exchange for legal services.If the value of the dental services equals the value of the legal services, neither A nor B has earned taxable income.

Question 12

The employee retirement plan adopted by BT Corporation provides that the total amount of retirement benefits provided to a particular employee under the plan can be reduced by the amount of any social security benefits to which that employee is entitled.Because this provision of the plan discriminates in favor of the highly compensated employees of BT, the retirement plan cannot be "qualified" for Federal tax purposes.

Question 13

Qualified retirement plans may be funded or non-funded by the employer.

Question 14

Employee Q has been a participant in his employer's non-qualified retirement plan for 25 years, during which period Q's employer has made regular annual contributions to the plan on Q's behalf.Q's right to his retirement fund is fully vested.Upon retirement, any amounts withdrawn from this plan will be fully taxable to Q.

Question 15

If a taxpayer makes a § 83(b) election to recognize current income on the receipt of restricted property, the subsequent forfeiture of the property will give rise to a tax deduction.

Question 16

B Inc.has an unfunded deferred compensation program for its employees.In the current year, B employees earned $120,000 in deferred compensation, none of which is taxable to any employee.If B Inc.is an accrual basis taxpayer, the corporation may claim a $120,000 tax deduction in the current year because of its deferred compensation liability.

Question 17

As a general rule, any economic benefit granted an employee by his or her employer and intended to compensate the employee for services rendered represents gross income to the employee.

Question 18

Individuals who are not disabled and who make lump-sum withdrawals from an Individual Retirement Account (IRA) prior to age 5972 years must pay a 10 percent penalty tax.

Question 19

During the current year, AC Corporation required a key employee, Taxpayer X, to transfer from AC's San Diego, California office to AC's Phoenix, Arizona office.AC agreed to pay the commission charged by the real estate agent on the sale of X's home in San Diego.Because the payment represents a "working condition fringe benefit," the amount of the real estate commission paid is not included in X's gross income for the current year.

Question 20

An accrual basis employer may take a deduction for deferred compensation when the employer promises to pay the deferred compensation, but does not set aside funds for that purpose.

Question 21

In the current year, ZT Inc., an accrual basis taxpayer, declares a $75,000 year-end bonus to its president, Mr.Z.Upon Z's request, ZT agrees to defer payment of the bonus for 10 years, at which time Z is anticipating retirement.The deferred compensation arrangement is unfunded, so that Z becomes an unsecured creditor of T.Based on these facts, which of the following is accurate?

A)Although Mr.Z does not receive a cash payment of the bonus, he is in "constructive receipt," and therefore, must include the $75,000 in current year income.
B)Although T does not pay the bonus, the liability incurred entitles ZT Inc.to deduct the bonus in the current year.
C)Because the deferred compensation arrangement is not a qualified retirement plan, Mr.Z must include $75,000 in current-year income.
D)Mr.Z has no tax liability on the $75,000 until the deferred compensation is actually paid.

Question 22

Which of the following fringe benefits may be taxable to the recipient?

A)Employer-provided parking
B)Employer-provided on-premises health club or athletic facility privileges
C)Employer-provided interior decorating for a new personal residence
D)Employer-provided child and dependent care services

Question 23

In 2009, Corporation D granted a non-qualified stock option to employee Z, which entitled Z to purchase 500 shares of D stock at $100 per share at any time until 2014.Upon date of the option grant, D stock was selling at $90 per share.In 2012, when the market price of D stock had increased to $145 per share, Z exercised his option.Based on these facts, Z must recognize

A)$50,000 ordinary income in 2009
B)$50,000 ordinary income in 2012
C)$22,500 ordinary income in 2012
D)No ordinary income until the stock is sold by Z

Question 24

During the current year, Corporation P granted an incentive stock option (ISO) to Employee A.The option entitled A to purchase 500 shares of P stock for $150 per share.On the date the option was granted, P stock had a market value of $130 per share.Three years after the grant, A exercised the option when P stock had a market value of $190 per share.Eight months after A acquired the 500 shares, he sold them for $200 per share.Based on these facts, A should report a gain on sale of

A)$20,000 ordinary income and $5,000 capital gain
B)$25,000 capital gain
C)$25,000 ordinary income
D)$5,000 capital gain

Question 25

If contributions are made to an employer-sponsored (i.e., not a Federal retirement program), qualified retirement plan,

A)The employer's contributions on behalf of the employee are not includible in the employee's gross income.
B)The employer is entitled to a current deduction for contributions to such plans.
C)The employee includes the retirement benefits in his or her gross income in the tax year of receipt.
D)All of the above are true.

Question 26

During the current year, Corporation J granted a non-qualified stock option to Employee E.The option allowed E to buy 1,000 shares of J stock for $100 per share at any time during the next four years.At the date of the grant, the market price of E stock was $110 per share, and thus, the option's value was $10,000.Two years after the option was granted, E exercised the option when the market price of E stock was $160 per share.Based on these facts, E should report

A)No income until he sells the 1,000 shares of E stock
B)$10,000 of ordinary income in the current year, but no income in the year the option is exercised
C)$10,000 of ordinary income in the current year, and $50,000 of ordinary income in the year the option is exercised
D)No income in the current year and $60,000 of ordinary income in the year the option is exercised

Question 27

Lump sum distributions out of an Individual Retirement Account (IRA) are not eligible for the forward averaging tax computation.

Question 28

Under § 401, which of the following is true regarding a qualified retirement plan?

A)Any employee who has reached 18 years of age must be eligible to participate after completing one year of service for the employer.
B)The plan may not exclude an employee from participation because of a maximum age.
C)The plan may exclude an employee who is a union member.
D)The plan will provide sufficient coverage if it benefits at least two-thirds of all employees not considered highly compensated.

Question 29

In recent years Congress has passed legislation to systematically reduce the retirement benefits available to self-employed individuals through use of a Keogh plan.

Question 30

Under a defined benefit plan for 2011,

A)The highest annual retirement benefit payable may not exceed $195,000.
B)The highest annual retirement benefit payable may not exceed 100 percent of the employee's average earnings in his or her three highest compensation years.
C)No minimum current contribution is required.
D)None of the above is correct.

Question 31

During the current year, Taxpayer Q quits her job.As a participant in her employer's qualified retirement plan, Q is entitled to a payment of $100,000.Q never made any contributions of her own to this plan.Based on these facts, which of the following statements is incorrect?

A)If Q decides to take her $100,000 in the form of a yearly annuity for life, the full amount of the annual payment received must be included in her gross income.
B)If Q is age 61 in the current year and decides to take her $100,000 in the form of a lump sum distribution, she may elect to pay the tax on the distribution over a five-year period.
C)If Q decides to take her $100,000 in the form of a lump sum distribution, she may roll the amount over into an IRA and avoid paying any current tax on the distribution.
D)If Q is age 40 in the current year, she will pay a 10 percent penalty tax on any amount of the distribution included in her gross income for the year.

Question 32

In the current year, employee F is given an incentive stock option (ISO) entitling him to purchase 100 shares of his employer Sigma Corporation's stock for $50 per share.He exercises the option in the following year when the shares are selling for $80 per share.If F sells these 100 shares four years later for $200 per share, he will recognize

A)A long-term capital gain of $120 per share
B)A long-term capital gain of $150 per share
C)Ordinary income of $30 per share and a long-term capital gain of $120 per share
D)No income upon sale

Question 33

In 2011, Corporation M transferred 1,000 shares of its common stock to employee Y as a year-end bonus.However, Y will forfeit the shares if he leaves his position with the corporation before 2013.Y makes a § 83(b) election to include the $90,000 current value of the shares in his 2011 income.In 2013, Y is still working for Corporation M and his 1,000 shares are worth $230,000.Based on these facts

A)Corporation M may take no deduction for the transfer of its own shares to Y.
B)Corporation M may take a $90,000 deduction in 2011.
C)Corporation M may take a $90,000 deduction in 2013.
D)Corporation M may take a $230,000 deduction in 2013.

Question 34

In 2011, employee E receives 10 shares of the common stock of his employer, Beta Corporation, as compensation.However, E will have to return the shares if he leaves his position with Beta before 2012.If E does not make a § 83(b) election with regard to the shares

A)He will recognize no income in 2011 because of the receipt of the stock.
B)He will never recognize income on the stock.
C)He will recognize 2011 income equal to the current value of the shares.
D)He will recognize income only when he leaves his position with Beta and forfeits his shares.

Question 35

Which plans are included under defined contribution plans?

A)§ 401(k) salary-reduction plans
B)Profit-sharing plans
C)Employee Stock Ownership Plans
D)Money purchase pension plans
E)All of the above

Question 36

Under § 401, contributions made as part of a qualified retirement plan must be paid into a trust

A)Administered by the employer
B)Established by the employees
C)That may be used by the corporation as a source of emergency funds
D)None of the above is correct.

Question 37

If an employer's contributions are made to a non-qualified retirement plan in which employees are fully vested,

A)The employer's contributions on behalf of the employee are includible in the employee's gross income.
B)The employer is not entitled to a current deduction for contributions to such plans.
C)The employee is allowed a deduction for current contributions, but must include retirement benefits in his or her gross income in the tax year of receipt.
D)All of the above are true.

Question 38

A self-employed individual who establishes a qualified retirement plan for his employees may be eligible for participation in the plan.

Question 39

In 2011, P receives stock worth $15,000 from Q Corporation as payment for services rendered.The stock is subject to substantial risk of forfeiture, i.e., if P leaves Q Corporation before 2013, she must forfeit the stock.P chooses to make a § 83(b) election and include the $15,000 value of the stock in her 2011 gross income.In 2013 the risk of forfeiture lapses, the property is worth $38,000.

A)P must include $23,000 gross income attributable to the property in 2013.
B)P has no gross income attributable to the property in 2013.
C)P cannot recognize the gross income from the property in 2011.
D)None of the above is correct.

Question 40

In 2009, Z received non-qualified stock options as part of her compensation from U Corporation.When granted, the options had no ascertainable value.In 2012, Z exercised the options and purchased 1,000 shares of U stock, market value $100 per share, for the option price of $70 per share.Accordingly,

A)In 2012, Z must recognize $100,000 in ordinary income.
B)In 2012, Z must recognize $70,000 in ordinary income.
C)In 2012, Z must recognize $30,000 in ordinary income.
D)None of the above is correct.

Question 41

Which of the following is not a benefit of a qualified employer retirement plan?

A)Earnings on amounts contributed to the plan are tax-exempt.
B)There is no limitation on the annual amount an employer may contribute to the plan for the benefit of each employee.
C)Benefits paid from a plan in a lump sum distribution may be taxed using a beneficial five-year forward averaging method.
D)Participant employees are not taxed on employer contributions until such contributions are withdrawn from the plan.

Question 42

Mr.T, an architect, had current year earned income of $25,000 in 2011.Mrs.T earned $1,800 during the year by typing for university students.The maximum amount the Ts may collectively contribute to their Individual Retirement Accounts is

A)$4,000
B)$5,000
C)$5,800
D)$8,000
E)$10,000

Question 43

Mr.M has earned income of $125,000 in the current year and is a participant in his employer's qualified retirement plan.Mrs.M is a housewife and has no earned income.During 2011, the Ms may make total deductible contributions to their IRAs of

A)$0
B)$4,000
C)$5,000
D)$10,000