Exam 15: Compensation and Retirement Planning

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 salary and a $1.7 million bonus because Mr. Hazel met a performance goal established by outside members of the board of directors. The corporation is allowed to deduct the entire amount of Mr. Hazel's compensation.

Six years ago, HOPCO granted Lin 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, Lin Sing exercised the ISO when the market price was $64 per share. How much ordinary income does she recognize because of the exercise?

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.

Which of the following statements concerning the client-independent contractor relationship is false?

What is the maximum IRA contribution that Mr. Higgins can make under each of the following assumptions? a. He is age 22 and single. His only income is $14,000 of interest and dividends from a trust fund. b. He is age 30 and single. His only income is a $35,000 distributive share of ordinary business income from a partnership. c. He is age 60 and single. His only income is $44,000 wages from his job. d. He is 45 and files a joint return with his wife. His sole proprietorship generates an $8,200 loss, and his wife's salary is $50,000.

This year, Larry was awarded a bonus by his corporate employer that will be paid in five annual installments beginning in the year Larry retires. The employer's liability for the future payment is unfunded. Even though Larry earned the bonus this year, he does not recognize any current income.

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 35% tax rate, compute Haven's deferred tax asset or deferred tax liability (identify which) resulting from the $16,500 compensation expense.

Harold Biggs is provided with $200,000 coverage under his employer's group-term life insurance plan. Which of the following statements is true?

An employee recognizes taxable income if his employer provides group-term life insurance coverage in excess of $50,000.

Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than the year following the year in which they reach age 70½.

An individual who wants to roll over the balance in an employer-sponsored qualified retirement plan to an IRA should always choose a Roth IRA over a traditional IRA.

Reimbursed employment-related business expenses have no net effect on the employee's taxable income.

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.

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.

Lars withdrew $20,000 from a retirement account and used the money to buy a new car. Assuming that his marginal rate on ordinary income is 28%, compute the tax cost of the withdrawal in each of the following cases. a. Lars is 40 years old. He withdrew the money from a personal savings account. b. Lars is 40 years old. He withdrew the money from his employer-sponsored qualified plan after resigning from his job. c. Lars is 65 years old. He withdrew the money from a Roth IRA.

An independent contractor is not entitled to the same fringe benefits as an employee.

Which of the following is not a benefit of nonqualified deferred compensation plans?

Lawrence is a U.S. citizen who has worked in his employer's Paris office for the past five years. Compute Lawrence's 2016 AGI if his only item of income was his $130,000 salary.

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?

Peter is a 20-year old college student who is claimed as a dependent on his parents' tax return. Peter's AGI consists of $12,000 interest and dividend income from a trust fund and $4,180 of wages from a part-time job. Compute Peter's maximum IRA contribution: