Question 1

Which of the following statements regarding employee versus independent contractor status is false?

Accepted Answer

A)  The determination as to whether a worker is an employee or an independent contractor is based on a subjective set of guidelines. 
B)  An employer has a financial incentive to classify a worker as an independent contractor instead of an employee. 
C)  The IRS has a higher probability of collecting income and payroll taxes from an independent contractor than from an employee. 
D)  If the IRS reclassifies a worker from independent contractor to employee, the employer can become liable for the employee's share of unpaid payroll taxes. 
A)  The determination as to whether a worker is an employee or an independent contractor is based on a subjective set of guidelines. 
B)  An employer has a financial incentive to classify a worker as an independent contractor instead of an employee. 
C)  The IRS has a higher probability of collecting income and payroll taxes from an independent contractor than from an employee. 
D)  If the IRS reclassifies a worker from independent contractor to employee, the employer can become liable for the employee's share of unpaid payroll taxes.

Question 2

On March 1, 2015, Bema Inc. issued 600 shares of its publicly traded stock as compensation to its employee, Ms. McPhee. On date of issuance, the stock's fair market value was $12,000. Under the terms of her 2015 employment contract, Ms. McPhee couldn't dispose of the stock before July 1, 2018, and if she terminated her employment with Bema before that date, she had to forfeit the stock back to Bema. Ms. McPhee made a timely election in 2015 to accelerate income recognition with respect to the 600 shares of restricted stock. On July 1, 2018, Ms. McPhee, who was still employed by Bema, sold all 600 shares for $26,000. What are the 2018 tax consequences to Ms. McPhee?

Accepted Answer

A)  She recognizes $26,000 ordinary income and zero capital gain on sale of the stock. 
B)  She recognizes zero ordinary income and $14,000 capital gain on sale of the stock. 
C)  She recognizes zero ordinary income and $26,000 capital gain on sale of the stock. 
D)  She recognizes $12,000 ordinary income and $14,000 capital gain in sale of the stock. 
A)  She recognizes $26,000 ordinary income and zero capital gain on sale of the stock. 
B)  She recognizes zero ordinary income and $14,000 capital gain on sale of the stock. 
C)  She recognizes zero ordinary income and $26,000 capital gain on sale of the stock. 
D)  She recognizes $12,000 ordinary income and $14,000 capital gain in sale of the stock.

Question 3

Which of the following statements regarding fringe benefits is false?

Accepted Answer

A)  The general rule is that an employee fringe benefit is taxable unless the benefit is specifically excluded from the employee's gross income. 
B)  Employers are not allowed to deduct the cost of nontaxable employee fringe benefits. 
C)  Nontaxable fringe benefits must be provided to employees on a nondiscriminatory basis. 
D)  None of the above is false. 
A)  The general rule is that an employee fringe benefit is taxable unless the benefit is specifically excluded from the employee's gross income. 
B)  Employers are not allowed to deduct the cost of nontaxable employee fringe benefits. 
C)  Nontaxable fringe benefits must be provided to employees on a nondiscriminatory basis. 
D)  None of the above is false.

Question 4

Unreimbursed moving expenses are an itemized deduction.

Accepted Answer

A) True 
 B)False

Question 5

On June 30, 2015, Kelso Inc., a calendar year corporation, issued 2,000 shares of its publicly traded stock as compensation to its employee, Nick Penn. On date of issuance, the stock's fair market value was $13,500. Under the terms of his 2015 compensation contract, Mr Penn couldn't dispose of the stock before February 1, 2019, and if he terminated his employment with Kelso before that date, he had to forfeit the stock back to Kelso. On February 1, 2019, the fair market value of the 2,000 shares was $20,000. Which of the following statements is true?

Accepted Answer

A)  If Mr. Penn elected to recognize income with respect to the restricted stock in 2015, Kelso was allowed to deduct $13,500 as employee compensation in 2015. 
B)  Kelso was allowed to deduct $13,500 as employee compensation in 2015. 
C)  Kelso is allowed to deduct $20,000 as employee compensation in 2019. 
D)  None of the above is true. 
A)  If Mr. Penn elected to recognize income with respect to the restricted stock in 2015, Kelso was allowed to deduct $13,500 as employee compensation in 2015. 
B)  Kelso was allowed to deduct $13,500 as employee compensation in 2015. 
C)  Kelso is allowed to deduct $20,000 as employee compensation in 2019. 
D)  None of the above is true.

Question 6

In 2018, Largo Inc., a calendar year corporation, accrued a $45,000 year-end bonus payable to its communications director. Largo and the director are not related parties. Largo paid the bonus to the director on April 3, 2019. Dargo can deduct the bonus in 2018.

Accepted Answer

A) True 
 B)False

Question 7

This year, Mrs Pike's compensation from her corporate employer consisted of $325,000 current salary and $75,000 unfunded deferred compensation payable upon her retirement at age 66. Which of the following statements is true?

Accepted Answer

A)  This year, Mrs Pike must include $400,000 in gross income, and her employer is allowed a $400,000 deduction. 
B)  This year, Mrs Pike must include $325,000 in gross income, and her employer is allowed a $400,000 deduction. 
C)  This year, Mrs Pike must include $400,000 in gross income, and her employer is allowed a $325,000 deduction. 
D)  This year, Mrs Pike must include $325,000 in gross income, and her employer is allowed a $325,000 deduction. 
A)  This year, Mrs Pike must include $400,000 in gross income, and her employer is allowed a $400,000 deduction. 
B)  This year, Mrs Pike must include $325,000 in gross income, and her employer is allowed a $400,000 deduction. 
C)  This year, Mrs Pike must include $400,000 in gross income, and her employer is allowed a $325,000 deduction. 
D)  This year, Mrs Pike must include $325,000 in gross income, and her employer is allowed a $325,000 deduction.

Question 8

Six years ago, Linus Corporation granted Pauline a nonqualified option to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the option when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.

Accepted Answer

A)  $135,000 gain 
B)  $10,000 loss 
C)  $35,000 loss 
D)  No gain or loss on sale 
A)  $135,000 gain 
B)  $10,000 loss 
C)  $35,000 loss 
D)  No gain or loss on sale

Question 9

This year, Haven Corporation granted a nonqualified stock option to Olivia to buy 5,000 shares of Haven stock for $20 for five years. At date of grant, Haven stock was selling on Nasdaq for $19 per share. For financial statement purposes, Haven recorded $16,500 compensation expense for the estimated value of the option. 
-Five years after Haven granted the option to Olivia, she exercised it on a day when Haven stock was selling for $27 per share.
a. How much income must Olivia recognize in the year of exercise?
b. What is Haven's tax deduction in the year of exercise?
c. What is the effect of the exercise on Haven's book income and deferred taxes?

Accepted Answer

a. 5,000 × ($27 - $20) = $35,0

Question 10

Six years ago, HOPCO granted Lin Sing a nonqualified option to purchase 1,000 shares of HOPCO stock at $55 per share. On date of grant, the market price was $50 per share. This year, Lin Sing exercised the option when the market price was $64 per share. How much ordinary income does Lin Sing recognize because of the exercise?

Accepted Answer

A)  $0 
B)  $5,000 
C)  $9,000 
D)  $14,000 
A)  $0 
B)  $5,000 
C)  $9,000 
D)  $14,000

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

On June 30, 2015, 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 2015 compensation contract, Mr Barnes couldn't dispose of the stock before January 1, 2019, 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 2015. On January 2, 2019, Mr Barnes, who was still a Gruen employee, sold all 2,000 shares for $47,500. What are the 2019 tax consequences to Mr Barnes?

Accepted Answer

A)  He recognizes $47,500 ordinary income and zero capital gain on sale of the stock. 
B)  He recognizes zero ordinary income and $47,500 capital gain on sale of the stock. 
C)  He recognizes zero ordinary income and $13,500 capital gain on sale of the stock. 
D)  He recognizes $34,000 ordinary income and $13,500 capital gain in sale of the stock. 
A)  He recognizes $47,500 ordinary income and zero capital gain on sale of the stock. 
B)  He recognizes zero ordinary income and $47,500 capital gain on sale of the stock. 
C)  He recognizes zero ordinary income and $13,500 capital gain on sale of the stock. 
D)  He recognizes $34,000 ordinary income and $13,500 capital gain in sale of the stock.

Question 13

Any individual taxpayer who earns any amount of compensation or self-employment income can contribute $5,500 to a traditional IRA.

Accepted Answer

A) True 
 B)False

Question 14

Lana, an employee of Compton University, paid $1,500 for professional journal subscriptions and $1,000 membership dues to academic organizations. Her employer reimbursed her only for the $1,000 membership dues. Which of the following statements is true?

Accepted Answer

A)  Lana must include the $1,000 reimbursement in gross income. 
B)  Lana is allowed an itemized deduction for the $1,500 paid for the journal subscriptions. 
C)  Lana is allowed an above-the-line deduction for the $1,500 paid for the journal subscriptions. 
D)  The $1,500 paid for the journal subscriptions is a nondeductible expense. 
A)  Lana must include the $1,000 reimbursement in gross income. 
B)  Lana is allowed an itemized deduction for the $1,500 paid for the journal subscriptions. 
C)  Lana is allowed an above-the-line deduction for the $1,500 paid for the journal subscriptions. 
D)  The $1,500 paid for the journal subscriptions is a nondeductible expense.

Question 15

This year, Haven Corporation granted a nonqualified stock option to Olivia to buy 5,000 shares of Haven stock for $20 for five years. At date of grant, Haven stock was selling on the Nasdaq for $19 per share. For financial statement purposes, Haven recorded $16,500 compensation expense for the estimated value of the option.
-a. How much income must Olivia recognize as a result of the grant of the option?
b. Can Haven deduct the $16,500 compensation expense on this year's tax return?
c. Assuming a 21% tax rate, compute Haven's deferred tax asset or deferred tax liability (identify which) resulting from the $16,500 compensation expense.

Accepted Answer

a. $0.
b. No.
c. $16

Question 16

The value of a nontaxable fringe benefit is different for each employee because employees have different financial needs and consumption preferences.

Accepted Answer

A) True 
 B)False

Question 17

Six years ago, Linus Corporation granted Pauline an incentive stock option (ISO) to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the ISO when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.

Accepted Answer

A)  $135,000 gain 
B)  $10,000 loss 
C)  $35,000 loss 
D)  No gain or loss on sale 
A)  $135,000 gain 
B)  $10,000 loss 
C)  $35,000 loss 
D)  No gain or loss on sale

Question 18

Mr Hazel, the principal executive officer of a publicly held corporation, received $2.5 million compensation this year. The compensation consisted of an $800,000 base salary and a $1.7 million year-end bonus for outstanding performance. The corporation is allowed to deduct the entire amount of Mr Hazel's compensation.

Accepted Answer

A) True 
 B)False

Question 19

Wages paid by an employer to an employee who is the employer's child under age 18 are not subject to federal FICA and unemployment taxes.

Accepted Answer

A) True 
 B)False

Question 20

Nonqualified deferred compensation plans are prohibited from discriminating in favor of highly compensated employees.

Accepted Answer

A) True 
 B)False

Which of the following statements regarding employee versus independent contractor status is false?

Which of the following statements regarding fringe benefits is false?

Unreimbursed moving expenses are an itemized deduction.

In 2018, Largo Inc., a calendar year corporation, accrued a $45,000 year-end bonus payable to its communications director. Largo and the director are not related parties. Largo paid the bonus to the director on April 3, 2019. Dargo can deduct the bonus in 2018.

This year, Mrs Pike's compensation from her corporate employer consisted of $325,000 current salary and $75,000 unfunded deferred compensation payable upon her retirement at age 66. Which of the following statements is true?

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.

Any individual taxpayer who earns any amount of compensation or self-employment income can contribute $5,500 to a traditional IRA.

Lana, an employee of Compton University, paid $1,500 for professional journal subscriptions and $1,000 membership dues to academic organizations. Her employer reimbursed her only for the $1,000 membership dues. Which of the following statements is true?

The value of a nontaxable fringe benefit is different for each employee because employees have different financial needs and consumption preferences.

Wages paid by an employer to an employee who is the employer's child under age 18 are not subject to federal FICA and unemployment taxes.

Nonqualified deferred compensation plans are prohibited from discriminating in favor of highly compensated employees.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes as Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income from Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters

Exam 15: Compensation and Retirement Planning

Which of the following statements regarding employee versus independent contractor status is false?

Which of the following statements regarding fringe benefits is false?

Unreimbursed moving expenses are an itemized deduction.

In 2018, Largo Inc., a calendar year corporation, accrued a $45,000 year-end bonus payable to its communications director. Largo and the director are not related parties. Largo paid the bonus to the director on April 3, 2019. Dargo can deduct the bonus in 2018.

This year, Mrs Pike's compensation from her corporate employer consisted of $325,000 current salary and $75,000 unfunded deferred compensation payable upon her retirement at age 66. Which of the following statements is true?

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.

Any individual taxpayer who earns any amount of compensation or self-employment income can contribute $5,500 to a traditional IRA.

Lana, an employee of Compton University, paid $1,500 for professional journal subscriptions and $1,000 membership dues to academic organizations. Her employer reimbursed her only for the $1,000 membership dues. Which of the following statements is true?

The value of a nontaxable fringe benefit is different for each employee because employees have different financial needs and consumption preferences.

Wages paid by an employer to an employee who is the employer's child under age 18 are not subject to federal FICA and unemployment taxes.

Nonqualified deferred compensation plans are prohibited from discriminating in favor of highly compensated employees.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes as Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income from Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters