Reference no: EM13910436

Following are 41 multiple choice questions that related to taxation about the employee's retirement plan (IRA, Non-qualified defer plan, Stock option etc.)

1. All of the following permit income to be deferred into later years except

a. an installment sale.
b. a like-kind exchange.
c. a lump-sum distribution from a qualified plan.
d. a deferral of income into a nonqualified deferred compensation plan.

2. Which of the following statements about conversion of income is correct?

a. Converting ordinary income into long-term capital gain is a beneficial tax planning strategy.
b. Converting long-term capital gain into ordinary income is a beneficial tax planning strategy.
c. Converting qualifying dividends into interest income is a beneficial tax planning strategy.
d. Holding assets that will generate a long-term capital gain inside a qualified retirement plan is a beneficial tax planning strategy.

3. Jerry purchased a very risky emerging market stock, Maidu, Inc., on June 1st of last year. He purchased 3,000 shares for $10 per share. By year's end, the value of each share had risen to $92. He decided not to sell his shares of Maidu, Inc., last year, because he was in the 35% federal marginal tax bracket; also, he wanted hold onto the stock long enough to be taxed at long-term capital gains rates. Subsequently, the price of Maidu, Inc., tumbled and Jerry liquidated all of his holdings in June of this year for $4.25. Based upon the fact pattern as described, which of the following are correct statements?
I. Jerry's unrealized paper profit as of the end of last year was more than 900%.
II. Had Jerry cashed in all of his Maidu, Inc., stock at the end of last year, he would have paid $86,100 in taxes, assuming his gain was subject to a federal tax rate of 35%.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. George has been selected as the new Chief Financial Officer of Infrastructure Unlimited and has been issued 10,000 shares of its stock at no cost to him. The stock will vest in increments of 2,000 shares per year over the next five years. Which of the following are correct statements regarding the restricted stock that was issued to George?
I. He cannot transfer the stock to anyone else.
II. No income has to be reported by George for the year he receives the restricted stock.
III. As George vests in each increment of 2,000 shares, the fair market value (FMV) of that portion of the stock will be treated as taxable compensation to him.
IV. If George had been required to pay some portion of the cost of the stock as part of the transaction, only the excess of its FMV over his cost basis would be considered taxable compensation.

a. I and III only
b. II and IV only
c. I, III, and IV only
d. I, II, III, and IV

5. Tim has two IRAs: a nondeductible IRA (which is not a Roth IRA) and a deductible IRA. He withdrew $9,000 from his nondeductible IRA during the current year and did not make any withdrawals from his deductible IRA. Over the years he has funded his nondeductible IRA with contributions totaling $20,000 and has also made additional contributions to his deductible IRA. At the end of the current year, his two IRAs have a total value of $51,000. How much of the distribution, if any, is a tax-free recovery of basis?

a. $0
b. $3,000
c. $6,000
d. $9,000

6. Jerry died in March of last year and left his $900,000 IRA equally to his three sons. The IRA was segregated into three $300,000 separate IRAs before September 30th of this year. Which of the following statements regarding the determination of the minimum required distribution (MRD) is correct?

a. Because the IRA was segregated into three IRAs after Jerry's death, he is treated as having no designated beneficiary and the entire amount in the IRA must be distributed within five years.
b. Because the IRA was not segregated into three IRAs prior to Jerry's death, the segregation is disregarded and the MRD is calculated using the youngest son's life expectancy.
c. Because the IRA was not segregated into three IRAs prior to December 31st of the year in which Jerry died, the segregation is disregarded and the MRD is calculated using the oldest son's life expectancy.
d. Because the IRA was segregated into three IRAs prior to September 30th of this year (the year following Jerry's death), this allows the MRDs to be calculated using each son's single life expectancy.

7. As of December 31st of last year, James had three different IRAs (IRA #1, IRA #2, and IRA #3) with an aggregate value of $218,000. All of his contributions to IRA #1 have consisted of nondeductible contributions, a total of $15,000 over the years. None of his IRAs are Roth IRAs. On October 14th of last year, James withdrew $10,000 from IRA #1. Which one of the following is a correct statement about his $10,000 withdrawal?

a. The taxable amount of the distribution is approximately 85% of $10,000.
b. None of last year's $10,000 distribution will be subject to income tax.
c. Approximately $9,542 of last year's $10,000 distribution will be subject to income tax.
d. Approximately $438 of last year's distribution will be classified as nontaxable.

8. Janice retired this year at age 63 with an annuity pension of $4,000 per month for life. Her cost basis in the plan is $33,000 and the plan uses a life expectancy of 22 years. Based SOLELY on the facts as presented

a. Janice's cost basis will be calculated over 20, not 22, years.
b. 3-1/8% of her annual pension will not be taxed.
c. $46,500 will be taxable each year.
d. both b and c

9. Lisa was born on June 15, 1941. She will be age 70½ on December 16, 2011. John was born on August 30, 1940. He will be age 70½ on February 27, 2011. Regarding MRD (minimum required distribution) amounts from their IRAs,

a. John must take his first MRD no later than 4/1/2012.
b. Lisa must take her first MRD on or before 12/31/2011.
c. If John takes his first MRD on 2/28/2012, he is not obligated to take another distribution until 1/2/2013.

10. Which statement below does not correctly describe a concept related to nonqualified deferred compensation?

a. The availability of deferred compensation plan funds to the employee, without substantial restriction, generally result in constructive receipt.
b. Substantial risk of forfeiture exists when the employee's receipt of deferred compensation benefits is contingent upon performance of substantial services in the future.
c. An example of substantial risk of forfeiture provisions would be the employee's loss of rights to the plan benefits at death or disability.
d. The employee's receipt of anything that can be assigned a cash value results in economic benefit and taxation.
e. It generally is not necessary to provide a substantial risk of forfeiture in an unfunded plan.

11. Which one of the following is a characteristic of an unfunded excess benefit plan?

a. The plan must comply with the disclosure requirements, but not the reporting requirements under ERISA.
b. The plan must comply with the reporting requirements, but not the disclosure requirements under ERISA.
c. The plan must comply with both the disclosure and reporting requirements under ERISA.
d. The plan generally need not comply with either the disclosure or reporting requirements of ERISA.

12. Tax deferral in an unfunded plan

a. depends on whether an executive's right to compensation is subject to conditions.
b. may be achieved if the requirements of the constructive receipt doctrine are met for income that has already been earned.
c. may be achieved if the promise to pay the deferred amount is evidenced only by negotiable notes.
d. may be achieved if the election to defer is made no later than the last day of the preceding calendar year.

13. A funded deferred compensation plan

a. will provide tax deferral for an employer.
b. must be made available to all employees.
c. will provide an immediate deduction to an employer.
d. will be taxable to an employee if nonforfeitable.

14. Larry Patton is an employee of the Binder Box Co. Larry began working for Binder in 1979 as an executive in charge of the production department. As part of Larry's employment contract, Binder contributes to a separate account for Larry's benefit an amount equaling 10% of his salary each year. Larry's account is protected from the claims of his employer's creditors. The terms of this nonqualified plan state that the contribution of these amounts will cease and Larry will have no rights to the income if he dies or becomes permanently disabled. Otherwise, Larry is given the right to receive the deferred cash amounts upon termination of employment with Binder. This nonqualified deferred compensation plan segregates property for the benefit of Larry.

Which one of the following is an income tax implication of this plan for Larry, and why?

a. The employer contributions to the plan are taxable to Larry currently because they are not subject to a substantial risk of forfeiture.
b. The employer contributions to the plan are tax-exempt for Larry because they are less than 25% of salary.
c. The employer contributions to the plan are taxable to Larry currently because a separate account was established for his benefit.
d. The employer contributions to the plan are tax-exempt for Larry because his receipt of payments from the plan is contingent upon his continued employment with Binder Box Co.

15. Which of the following are characteristics of unfunded supplemental executive retirement plans?
I. The employee has no secured rights in the benefits to be paid.
II. These plans are often referred to as top hat plans because they are provided to top executives of the company.
III. The plan must establish substantial risk of forfeiture provisions to assure tax deferral.
IV. The plan is subject to most of the ERISA nontax requirements.

a. I and II only
b. III and IV only
c. I, II, and III only
d. II, III, and IV only

16. Which one of the following is a correct statement about a rabbi trust?

a. The employer recognizes a deduction when it makes contributions to the plan.
b. The employer can be discriminatory but must offer the plan to all key employees.
c. The employee can elect to use income averaging on lump-sum distributions.
d. The employer is taxed on the earnings in the plan as they accumulate.

17. Which of the following statements accurately describe characteristics of using life insurance for the informal funding of a nonqualified deferred compensation plan?
I. It represents an asset that may be purchased to fund the employer's unsecured promise to pay deferred amounts to the employee.
II. It offers the advantage of being able to fund a death benefit immediately.
III. It offers the advantage of various settlement options.
IV. It offers the advantage of simplified administration since death proceeds are paid directly to an employee's surviving spouse or other beneficiary.

a. I and II only
b. I and III only
c. II and IV only
d. I, II, and III only

18. John Simon recently entered into a pure nonqualified deferred compensation agreement with his employer. John's nonqualified plan benefits are subject to the claims of his employer's creditors; however, they are not subject to a substantial risk of forfeiture. John is currently in the 35% income tax bracket, but expects to be in the 31% bracket when he retires. Which of the following are correct statements about the advantages of this arrangement for John?
I. Deferrals to the plan are not subject to payroll taxes.
II. A major advantage of a nonqualified plan is deferral of taxation on income until a later date.
III. Some of the benefits are funded by his employer.
IV. There is no limit on the amount of compensation that may be contributed to the plan.

a. I and II only
b. I and III only
c. II and IV only
d. III and IV only

19. Which of the following are characteristics of SERPs and excess benefit plans?
I. Benefits are usually paid out of the employer's general assets.
II. Both plans are used to supplement benefits provided by the employer's qualified plan.
III. They are subject to the same ERISA requirements.
IV. The plan's benefit formula may provide for defined contributions or a defined benefit.

a. II only
b. III only
c. II and III only
d. I, II, and IV only

20. The managers of Baron Enterprises are eager to recruit Martin Hambrick, age 55, who is a marketing expert. Maintaining pay equity with other executives puts a limit on the salary they can offer him, and the company's qualified retirement plan and menu of other benefits are no better than those offered by Martin's current employer. The only way they'll get Martin to join them is to offer something special.
Martin is married to Susan, age 40. He has accumulated a very large estate, which is potentially subject to an enormous federal estate tax liability. Martin is strongly opposed to any type of retirement planning that would ultimately be subject to federal estate taxes and would like to avoid paying income taxes on any additional benefits while he is still working. However, he would like to provide additional income for Susan, assuming he predeceases her.

Which, if any, of the following nonqualified plans should Baron Enterprises use to recruit Martin?

a. secular trust
b. SERP
c. death benefit only plan
d. Baron Enterprises should not use a nonqualified plan to recruit Martin.

21. All of the following statements concerning nonqualified stock options (NQSOs) are correct except

a. generally there are no tax implications to the recipient on the grant date.
b. generally NQSOs granted at an exercise price that is less than the fair market value of the stock on the grant date are subject to income tax.
c. the company is not entitled to a tax deduction for the compensation element that is taxed to the employee.
d. the difference between the fair market value of the stock and the exercise price is recognized as additional compensation unless the stock is restricted.

22. With respect to an incentive stock option (ISO), an employee who is not subject to the alternative minimum tax generally recognizes income

a. upon the grant of the ISO.
b. upon the exercise of the ISO.
c. upon the sale of the stock acquired through the exercise of the ISO.
d. upon the lapse of the 10-year period beginning with the grant of the ISO.

23. All of the following are required for an employee to be able to treat the gain on a qualifying disposition of stock acquired through the exercise of an incentive stock option (ISO) as long-term capital gain except

a. generally the employee must have been continuously employed by the company that granted the ISO from the grant date up to three months before the exercise date.
b. the company must defer its compensation deduction from the exercise date until the disposition of the stock.
c. the disposition must occur more than two years from the date of grant.
d. the disposition must occur more than one year from the date of exercise.

24. The alternative minimum tax may affect

a. neither nonqualified stock options nor incentive stock options.
b. both nonqualified stock options and incentive stock options.
c. an individual who sells nonqualified stock options.
d. an individual who exercises incentive stock option.

25. Andrew exercises 1,000 NQSOs with an exercise cost of $8 per share at a time when the stock is trading at $34 per share. Andrew is unsure if he is permitted to sell just enough shares to cover the payroll tax due on his gain. In Andrew's situation,

a. until 90 days have passed, he will not be able to sell enough shares to cover the exercise price.
b. he can sell just enough shares to cover payroll taxes on $26,000 of taxable income.
c. the cost basis used will be $26, the difference between the stock's FMV and its exercise price.
d. no "cashless" exercise of the NQSOs can take place until two years has passed.

26. NJ Ltd. granted Elizabeth 10,000 ISOs with an exercise price of $50 per share one year ago. One-quarter of the ISOs will vest over each of the next four years. In Elizabeth's situation approximately

a. 10,000 shares will qualify for treatment as ISOs next year.
b. 2,000 shares may be treated as ISOs next year.
c. 2,000 shares qualify as ISOs this year and the balance will be treated as NQSOs.
d. one-half of all shares must be treated as NQSOs next year.

27. In differentiating between NQSOs and ISOs, it is correct to state which of the following?
I. At the time of grant, NQSOs suffer tax consequences only when the option is publicly traded.
II. The exercise price for ISOs can be only a maximum of 10% lower than the FMV of the stock on the grant date.
III. Payroll taxes on NQSOs are collected upon the sale of the stock.
IV. If the sale on an ISO is characterized as a disqualifying disposition, any gain is ordinary income to the extent of the spread at the time of exercise.

a. II, III, and IV only
b. I and III only
c. I and IV only
d. I, II, and III only

28. Robert Hornbaker was granted 3,000 incentive stock options with an exercise price of $20 on January 7, three years ago. The stock price was $20 on that date. This year, on February 28, he exercised all 3,000 options at $60. What is the tax impact of this transaction?

a. Robert will have an AMT income adjustment of $60,000.
b. Robert will have an AMT income adjustment of $120,000.
c. Robert will have additional income of $120,000 and federal withholding, FICA, and FUTA will not apply.
d. Robert will have additional income of $60,000 and federal withholding, FICA, and FUTA will apply.

29. Two years ago on January 29, Bette Cable was granted 2,000 nonqualified stock options with an exercise price of $13. The option value could not be determined on that date. On February 14 of this year she exercised all 2,000 options at $72. What is the tax impact of this transaction?

a. Bette will have an AMT income adjustment of $26,000.
b. Bette will have additional income of $64,000 and federal withholding, FICA, and FUTA will not apply. Her employer will not be able to deduct this income.
c. Bette will have an AMT income adjustment of $118,000.
d. Bette will have additional wages of $118,000 and federal withholding, FICA, and FUTA will apply. Her employer will be able to deduct $118,000.

30. On January 24, three years ago, Bill Bailey came home and announced to Judy, his wife, that he had been granted 8,000 nonqualified stock options with an exercise price of $6. Furthermore, the grant form indicated that the value of these options could not be determined on that date and that the market price of the stock on that date was $6. On July 2, this year, he exercised all 8,000 options at $56. What is the tax impact of this transaction?

a. Bill will have an AMT income adjustment of $48,000.
b. Bill will have additional income of $400,000 and federal withholding, FICA, and FUTA will not apply. Bill's employer may deduct the additional $400,000.
c. Bill will have an AMT income adjustment of $400,000 and federal withholding, FICA, and FUTA will apply.
d. Bill will have additional wages of $400,000 and federal withholding, FICA, and FUTA will apply. Bill's employer will be able to deduct an additional $400,000.

31. Three years ago, on September 17th, Phillip Jarvis was granted 3,800 incentive stock options (ISOs) with an exercise price of $30. The stock price was $30 on the date of the grant. On November 2nd of this year, he exercised 3,400 of the 3,800 ISOs he received three years ago at $74. Which, if any, of the following statements are true?
I. Phillip will have additional wages and short-term capital gains if he sells the stock he acquired with the options in December of this year.
II. A portion of Phillip's options cannot be treated as ISOs.

a. I only
b. II only
c. Neither I nor II
d. Both I and II

32. Emily Fernandez was granted 5,925 stock options with a market value of $22.19 per share and an exercise price of $22.19 per share five years ago. Last year, in February, she exercised all the options at $38.14. Emily sold all the stock yesterday, December 7th. Of the following statements, which are correct?
I. Assuming the options were ISOs, she would have had an AMT adjustment last year.
II. Assuming the options were nonqualified options, she must have had ordinary income from the exercise last year.
III. Part of the options she exercised last year had to be nonqualified options.
IV. Emily was not subject to FICA or federal withholding on the options she exercised last year.

a. I and III only
b. I and IV only
c. I, II, and III only
d. I, III, and IV only

33. The maximum alternative minimum tax rate for individuals is

a. greater than the maximum marginal federal income tax rate for individuals.
b. equal to the maximum marginal federal income tax rate for individuals.
c. less than the maximum marginal federal income tax rate for individuals.
d. going to decrease each year by 1% until it reaches 20% in 2010.

34. Marty Morrell exercised 1,000 incentive stock options (ISOs) issued to him by his employer, Vendor Rights, Inc. The exercise cost was $8 per option and the stock was trading for $60 per share at the time the options were exercised. Marty paid his $8,000 and, in return, received stock valued at $60,000. Which one of the following is a correct statement about the tax implications of this transaction for Marty?
I. Marty does report income for regular income tax purposes; for AMT purposes, he has a positive adjustment of $26,000.
II. Marty does not report income for regular income tax purposes; for AMT purposes, he has a positive adjustment of $52,000.

a. I only
b. II only
c. neither I nor II

35. Alternative minimum tax (AMT) traps for individual taxpayers may result from which of the following items?
I. wagering losses to the extent of earnings
II. state tax refunds
III. tax credits
IV. itemized deductions

a. I only
b. III and IV only
c. I, III, and IV only
d. I, II, III, and IV

36. Which of the following statements regarding the moving of income into an alternative minimum tax (AMT) year is correct?

a. the Internal Revenue Code prohibits the use of this technique
b. the minimum tax credit does play a role in this technique
c. this technique works when the AMT is due to the add-back of exclusion-type items
d. the taxpayer's marginal tax bracket in future years will be less than the top AMT rate of 28%

37. Which one of the following is a correct statement about income-based alternative minimum tax traps (AMT traps) and escapes?

a. 5% of the excluded gain on qualified small business stock must be included in alternative minimum taxable income (AMTI).
b. The exercise date of incentive stock options (ISOs) is not the factor that is considered when considering AMT treatment.
c. Local tax refunds are always excluded from AMTI.
d. All but 15% income from private activity bonds must be included in the AMT determination.

38. If it's true that the alternative minimum tax (AMT) is a parallel tax system, as one adds income subject to the AMT,

a. regular tax liability will increase, and will eventually do so at a faster rate.
b. regular tax liability can never equal the AMT liability.
c. marginal tax savings will be absorbed at an increasing rate, but not completely.
d. acceleration limitations increase, but at a decreasing rate.

39. Jim Sanders has a regular tax liability of $16,775 and a tentative minimum tax of $20,800 this year. If a child tax credit of $800 is applied,

a. the alternative minimum tax (AMT) is 15% (rounded) of the tentative minimum tax.
b. the percentage increase from regular tax liability to tentative minimum tax is 26% (rounded).
c. the child tax credit as a percentage of AMT is 20% (rounded).
d. the AMT as a percentage of total tax never exceeds 16% (rounded).

40. Nancy had a net regular tax liability this year of $46,000. Her tentative minimum tax was $43,000. This year she also received a $4,500 general business tax credit from one of her many Florida real estate partnership investments. Nancy was

a. not able to claim any business tax credit for this tax year.
b. able to claim up to $1,500 of business tax credit against her tentative minimum tax, but none against her net regular tax liability.
c. able to claim $3,000 of the credit against this year's tax liability, thus reducing her regular tax liability to $43,000.
d. not able to carry forward any remaining tax credits into future years without first subjecting her tentative minimum tax liability to carry-forward limitations.

41. Your client, Matthew Haynes, wants to know more about alternative minimum tax (AMT) traps. His tax preparer mentioned that alternative tax net operating losses (ATNOLs) are one of a number of deduction-based AMT traps and that ATNOL almost always differ from regular net operating losses. Good advice from Matthew's tax preparer would include

a. ATNOLs must first be carried back before they can be carried forward.
b. it might be preferable to carry any NOLs forward to produce more AMT savings.
c. accelerate depletion and depreciation deductions when deductions for personal exemptions are not taken.
d. reduce basis adjustments in connection with capital gains sales.