Question 1

Jeff,age 43,establishes a traditional IRA in 2012 and contributes $5,400 in cash to the plan.He has earned income of $30,600.What is the amount of the penalty tax that Jeff will incur,if any,assuming he keeps the $5,400 in the account?
A) $0.
B) $24.
C) $40.
D) $400.
E) None of the above.

Accepted Answer

The answer of Jeff,age 43,establishes a traditional IRA in 2012...

Question 2

Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach.What amount is deductible by the program in 2012 his first full year of employment.
A) None.
B) $1,000,000.
C) $3,000,000.
D) $4,500,000.
E) None of the above.

Accepted Answer

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

Question 3

Sammy,age 31,is unmarried and is not an active participant in a qualified retirement plan.His modified AGI is $55,000 in 2012.The maximum amount that Sammy can deduct for a contribution to a traditional IRA is:
A) $2,800.
B) $3,500.
C) $4,000.
D) $5,000.
E) None of the above.

Accepted Answer

Based on the information given, Sammy can deduct up to $5,000 for a contribution to a traditional IRA in 2012, as long as he has earned income of at least $5,000 for the year. This is because the maximum deductible contribution for an individual under age 50 in 2012 is $5,000, assuming they meet certain income limits and participate in a qualified retirement plan. However, since Sammy is not an active participant in a qualified plan, there are no income limits that would reduce the amount he can deduct. Therefore, the maximum contribution amount applies.

Question 4

Joyce,age 39,and Sam,age 40,who have been married for seven years,are both active participants in qualified retirement plans.Their total AGI for 2012 is $120,000.Each is employed and earns a salary of $65,000.What are their combined deductible contributions to traditional IRAs?
A) $0.
B) $3,000.
C) $4,000.
D) $8,000.
E) None of the above.

Accepted Answer

Since both Joyce and Sam are active participants in qualified retirement plans through their employers, their combined AGI exceeds the income limits for deductible contributions to traditional IRAs. For married couples filing jointly with a combined AGI between $95,000 and $115,000, the maximum deductible contribution is gradually phased out. For a combined AGI over $115,000, the deduction is completely phased out. Therefore, Joyce and Sam are not eligible to make any deductible contributions to traditional IRAs.

Question 5

What is the maximum amount Velvia can contribute to a Coverdell Education Savings Account (CESA)on behalf of a grandson in 2012? She is single with an AGI of $99,000.
A) $0.
B) $500.
C) $1,467.
D) $2,000.
E) None of the above.

Accepted Answer

The answer of What is the maximum amount Velvia can...

Question 6

Elvis receives a $2,000 distribution from a CESA.On this date,the total balance is $30,000,with $12,000 representing earnings.If his qualified higher education expenses are $2,195,what amount can he exclude from gross income?
A) $0.
B) $800.
C) $1,200.
D) $2,000.
E) Some other amount.

Accepted Answer

The answer of Elvis receives a $2,000 distribution from a...

Question 7

Pony,Inc.,issues restricted stock to employees in July 2012,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 Sam is issued 1,000 shares,and he does not make a § 83(b)election.At the end of 2012,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 2014).Sam sells his 1,000 shares in 2016 at $36 per share.What amount and type of income will Sam recognize in 2016?
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

The answer of Pony,Inc.,issues restricted stock to employees in July...

Question 8

Pony,Inc.,issues restricted stock to employees in July 2012,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 the stock is issued.An employee,Sam,decides to make the § 83(b)election with his 1,000 shares.At the end of 2012,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 2012.
C) $13,000 in 2012.
D) $10,000 when stock is sold.
E) $13,000 when stock is sold.

Accepted Answer

Pony can take a compensation deduction equal to the amount of income recognized by the employee, which is the fair market value of the stock at the time of vesting minus the amount paid for the stock. In this case, Sam made a § 83(b) election and recognized income of $10,000 ($13 - $10 per share x 1,000 shares). Therefore, Pony can take a compensation deduction of $10,000 in 2012. When Sam sells the stock, he will recognize any additional gain or loss and Pony will not be able to take any additional compensation deduction.

Question 9

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.What amount,if any,is deductible by the bank?
A) $0.
B) $50,000.
C) $110,000.
D) $390,000.
E) Some other amount.

Accepted Answer

The answer of Saysha is an officer of a local...

Question 10

Pony,Inc.,issues restricted stock to employees in July 2012,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 Sam is issued 1,000 shares,and he proceeds to make a § 83(b)election.At the end of 2012,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 2016 at $36 per share.What amount and type of income will Sam recognize in 2016?
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

The answer of Pony,Inc.,issues restricted stock to employees in July...

Question 11

Donna,age 27 and unmarried,is an active participant in a qualified retirement plan.Her AGI is $116,000.What amount,if any,may Donna contribute to a Roth IRA in 2012?
A) $0.
B) $3,000.
C) $4,000.
D) $5,000.
E) None of the above.

Accepted Answer

The answer of Donna,age 27 and unmarried,is an active participant...

Question 12

Pony,Inc.,issues restricted stock to employees in July 2012,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 the stock is issued.An employee,Sam,decides to make the § 83(b)election with his 1,000 shares.At the end of 2012,the stock is trading at $13 per share.How much income,if any,must Sam recognize in 2012?
A) $0.
B) $10,000 capital gain.
C) $10,000 ordinary income.
D) $13,000 capital gain.
E) $13,000 ordinary income.

Accepted Answer

Since Sam made the § 83(b) election, he recognizes ordinary income equal to the fair market value of the shares at the time of the grant minus any amount paid for the shares (which is $0 in this case). Therefore, he must recognize $10,000 of ordinary income in 2012. The increase in the stock price is not relevant for tax purposes until the shares are sold.

Question 13

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 in 2012?
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 the above.

Accepted Answer

The answer of The special § 83(b)election (i.e.,where income is...

Question 14

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

Saysha's cash settlement of $390,000 is greater than three times her average annual compensation of $110,000 for the past five tax years. This means that she is subject to an excise tax of 20% on the excess amount, which is $70,000 ($390,000 - $330,000). Therefore, Saysha must pay a nondeductible excise tax of $56,000 ($70,000 x 20%).

Question 15

Larry negotiates a $2.5 million contract with Red,Inc.,a publicly-held corporation that receives TARP funds,to become their CEO for 2012.What amount is deductible by Red,Inc.in 2012?
A) $0.
B) $1,000,000.
C) $2,064,000.
D) $2,500,000.
E) None of the above.

Accepted Answer

The answer of Larry negotiates a $2.5 million contract with...

Question 16

Frank established a Roth IRA at age 25 and contributed a total of $131,244 to it over 38 years.The account is now worth $376,000.How much of these funds can Frank withdraw tax-free?
A) $0.
B) $131,244.
C) $244,756.
D) $376,000.
E) None of the above.

Accepted Answer

The answer of Frank established a Roth IRA at age...

Question 17

Which statement is not true with respect to golden parachute payments?
A) Refers to excess severance pay.
B) Does 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 the above are true.

Accepted Answer

Golden parachute payments do not include payments from a qualified profit sharing plan.

Question 18

Beth,age 51,has a traditional deductible IRA with an account balance of $221,419 of which $160,400 represents contributions and $61,019 represents earnings.In 2012,she converts her traditional IRA into a Roth IRA.What amount,if any,must Beth include in her gross income in 2012?
A) $0.
B) $61,019.
C) $160,400.
D) $221,419.
E) None of the above.

Accepted Answer

The answer of Beth,age 51,has a traditional deductible IRA with...

Question 19

Harry receives a $10,000 distribution from a CESA.On this date,his total account balance is $16,000,with $4,000 representing earnings.If his qualified higher education expenses are $8,000,the amount included in gross income is:
A) None.
B) $500.
C) $2,000.
D) $2,500.
E) None of the above.

Accepted Answer

The answer of Harry receives a $10,000 distribution from a...

Question 20

Susan,an executive,receives a golden parachute payment of $500,000 from her employer.Her average annual compensation for the most recent five years is $100,000.Which of the following statements is correct?
A) The disallowed deduction to the employer is $500,000, and the excise tax to Susan is $100,000.
B) The disallowed deduction to the employer is $400,000, and the excise tax to Susan is $80,000.
C) The disallowed deduction to the employer is $100,000, and the excise tax to Susan is $20,000.
D) The disallowed deduction to the employer is $100,000, and the excise tax to Susan is zero.
E) None of the above.

Accepted Answer

Under IRC Section 280G, if a payment is considered a "parachute payment" (excessive compensation paid to an executive in connection with a change in ownership or control of a corporation), the employer cannot deduct the excess amount over the executive's average annual compensation for the past five years. In this case, the excess amount is $400,000 ($500,000 - $100,000 x 5). 
Additionally, the executive, Susan, will be subject to an excise tax equal to 20% of the excess amount over her average annual compensation, which is $80,000 ($400,000 x 20%). Therefore, the correct answer is B.

Quiz 19: Deferred Compensation

Jeff,age 43,establishes a traditional IRA in 2012 and contributes $5,400 in cash to the plan.He has earned income of $30,600.What is the amount of the penalty tax that Jeff will incur,if any,assuming he keeps the $5,400 in the account?

Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach.What amount is deductible by the program in 2012 his first full year of employment.

Sammy,age 31,is unmarried and is not an active participant in a qualified retirement plan.His modified AGI is $55,000 in 2012.The maximum amount that Sammy can deduct for a contribution to a traditional IRA is:

Joyce,age 39,and Sam,age 40,who have been married for seven years,are both active participants in qualified retirement plans.Their total AGI for 2012 is $120,000.Each is employed and earns a salary of $65,000.What are their combined deductible contributions to traditional IRAs?

What is the maximum amount Velvia can contribute to a Coverdell Education Savings Account (CESA) on behalf of a grandson in 2012? She is single with an AGI of $99,000.

Elvis receives a $2,000 distribution from a CESA.On this date,the total balance is $30,000,with $12,000 representing earnings.If his qualified higher education expenses are $2,195,what amount can he exclude from gross income?

Donna,age 27 and unmarried,is an active participant in a qualified retirement plan.Her AGI is $116,000.What amount,if any,may Donna contribute to a Roth IRA in 2012?

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 in 2012?

Larry negotiates a $2.5 million contract with Red,Inc.,a publicly-held corporation that receives TARP funds,to become their CEO for 2012.What amount is deductible by Red,Inc.in 2012?

Frank established a Roth IRA at age 25 and contributed a total of $131,244 to it over 38 years.The account is now worth $376,000.How much of these funds can Frank withdraw tax-free?

Which statement is not true with respect to golden parachute payments?

Beth,age 51,has a traditional deductible IRA with an account balance of $221,419 of which $160,400 represents contributions and $61,019 represents earnings.In 2012,she converts her traditional IRA into a Roth IRA.What amount,if any,must Beth include in her gross income in 2012?

Harry receives a $10,000 distribution from a CESA.On this date,his total account balance is $16,000,with $4,000 representing earnings.If his qualified higher education expenses are $8,000,the amount included in gross income is:

Susan,an executive,receives a golden parachute payment of $500,000 from her employer.Her average annual compensation for the most recent five years is $100,000.Which of the following statements is correct?