Exam 3 Multiple Choice Questions 1. Which of the following situations might convince an employer to choose a nonqualified retirement plan over a qualified profit-sharing plan? (a) The employer, a closely held C Corporation, is in the 15% income tax bracket and the sole owner of the employer is in the 35% income tax bracket. (b) The employer only wants to meet the organizations objectives of attracting executives, retaining executives, and providing for a graceful transition in company leadership. The employer is not concerned with providing retirement benefits to the rank and file employees. (c) The employer is not willing to pay high administrative costs. (d) All of the above. 2. Which of the following statements concerning rabbi trusts is(are) correct? (a) A rabbi trust is a trust established and sometimes funded by the employer that is subject to the claims of the employers creditors, but any funds in the trust cannot generally be used by or revert back to the employer. (b) A rabbi trust calls for an irrevocable contribution from the employer to finance promises under a nonqualified plan, and funds held within the trust cannot be reached by the employers creditors. (c) A rabbi trust can only be established by a religious organization. (d) All of the above are correct. 3. Jackie receives incentive stock options (ISOs) with an exercise price equal to the FMV at the date of the grant of $22. Jackie exercises these options 3 years from the date of the grant when the FMV of the stock is $30. Jackie then sells the stock 3 years after exercising for $35. Which of the following statements is (are) true? 1. At the date of grant, Jackie will have ordinary income equal to $22. 2. At the date of exercise, Jackie will have W-2 income of $8. 3. At the date of sale, Jackie will have long-term capital gain of $13. 4. Jackies employer will not have a tax deduction related to the grant, exercise or sale of this ISO by Jackie. (a) 3 only. (b) 3 and 4. (c) 2, 3, and 4. (d) 1, 2, and 4. Page 1 of 12 4. Marguerite received nonqualified stock options (NQSOs) with an exercise price equal to the FMV at the date of the grant of $22. Marguerite exercises the options 3 years after the grant date when the FMV of the stock was $30. Marguerite then sells the stock 3 years after exercising for $35. Which of the following statements are true? 1. At the date of the grant, Marguerite will have ordinary income of $22. 2. At the date of exercise, Marguerite will have W-2 income of $8. 3. At the date of sale, Marguerite will have long term capital gain of $5. 4. Marguerites employer will have a deductible expense in relation to this option of $22. (a) 3 only. (b) 2 and 3. (c) 2, 3, and 4. (d) 1, 2, 3, and 4. 5. Which of the following statements concerning tax considerations of nonqualified retirement plans is (are) correct? 1. Under IRS regulations an amount becomes currently taxable to an executive even before it is actually received if it has been constructively received. 2. Distributions from nonqualified retirement plans are generally subject to payroll taxes. (a) 1 only. (b) 2 only. (c) 1 and 2. (d) Neither 1 nor 2. 6. James is employed by a large corporation with 400 employees. The corporation provides its employees with a no-cost gym membership at the local public YMCAs. The cost of the membership is $60/month which is completely paid for by James employer for all employees. How much, if any, must James include in his yearly gross income related to this fringe benefit? (a) $0. (b) $60. (c) $600. (d) $720. 7. Which of the following situations would create an inclusion in an employees gross income? (a) Kay is the director and manager of Holiday Hotel. As a condition of her employment, Kay is required to live at the hotel. The value of this is $1,000 per month. Page 2 of 12 (b) Natalie is a secretary at JKL Law Firm. JKL provides her with free soft drinks. Natalie estimates that she drinks $20 worth of soft drinks per month. (c) Brian …
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