Exam 15: Compensation and Retirement Planning

On June 30, 2016, Gruen Inc. issued 2,000 shares of its publicly traded stock as compensation to its employee, Stu Barnes. On date of issuance, the stock's fair market value was $13,500. Under the terms of his employment contract, Mr. Barnes couldn't dispose of the stock before January 1, 2020, and if he terminated his employment with Gruen before that date, he had to forfeit the stock back to Gruen. Mr. Barnes made no election with respect to the restricted stock in 2016. On January 1, 2020, Mr. Barnes, who was still a Gruen employee, sold all 2,000 shares for $47,500. What are the 2020 tax consequences to Mr. Barnes?

Employees who save for retirement through an employer-sponsored qualified plan never include the earnings on their savings in gross income.

Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than April 1^st of the year following the year in which they reach age 72.

Six years ago, HOPCO granted Mrs. Sing an incentive stock option (ISO) to purchase 1,000 shares of HOPCO stock for $55 per share. On date of grant, the market price was $50 per share. This year, Mrs. Sing exercised the ISO when the market price was $64 per share. How much ordinary income does she recognize because of the exercise?

Lansing Corporation, a publicly held company with a 21% tax rate, paid its PEO an annual salary of $1 million plus a year-end bonus of $500,000 million. The bonus was based on a targeted amount of annual gross revenue. Ignoring payroll taxes, calculate the after-tax cost of this payment.

A corporation that transfers restricted stock to an employee as compensation may deduct the stock's fair market value in the year of transfer even if the employee doesn't recognize the value as gross income in the year of transfer.

Julie, a single individual, is employed by Dashell Inc. but doesn't participate in any employer-sponsored retirement plan. Julie's annual contribution to her traditional IRA is deductible.

Mrs. Soon retired at age 68 and withdrew the entire $77,100 balance from an IRA to buy a sailboat. She opened this account in 1999. Which of the following statements is false?

Mr. Sherman incurred $7,000 of employment-related business expenses. Which of the following statements is true?

Which of the following is not a factor considered by the courts when evaluating the reasonableness of an employee's compensation?

Stock options are a form of compensation that requires a substantial cash outlay by the corporate employer.

The 10% penalty imposed on premature withdrawals from qualified retirement plans is intended to discourage participants from withdrawing funds before retirement.

Which of the following statements regarding the foreign earned income exclusion is false?

Qualified withdrawals from both traditional and Roth IRAs are tax-exempt.

The IRS is less likely to raise the issue of reasonable compensation during the audit of a publicly held corporation than a closely held corporation.

A shareholder-employee of an S corporation prefers to receive a greater salary rather than a greater pro-rata share of corporate taxable income.

Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., a regular corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?

In 2011, Mr. Delgado exercised an option to purchase 1,000 shares of his employer's stock for $29 per share when the market price was $65 per share. This year, Mr. Delgado sold the stock for $80 per share. Which of the following statements is false?

A sole proprietor in the 37% tax bracket pays her 16-year-old son a reasonable salary of $14,000 for services performed for the proprietorship. Compute the family's income tax savings if the son has no other income and takes a $12,400 standard deduction.

Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., an S corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?