HS 321 Module 3

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HS 321 Module 3
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HS 321 Module 3
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  1. If alimony payments are deductible by one spouse under the alimony rules, the corresponding amount of income must be reported by the other spouse.

    a) True
    b) False
    a) True
  2. Payments of alimony may be made in either property or cash.

    a) True
    b) False
    b) False

    Alimony payments must be made in cash.
  3. Payments constituting alimony made by a husband to a former spouse for her support are deductible by the husband and taxable to the wife.

    a) True
    b) False
    a) True
  4. Excess alimony payments attributable to the first year of a divorce will be included in the payer’s taxable income for the third post-separation year.

    a) True
    b) False
    a) True
  5. The value of rent-free occupancy of a home by the former spouse and children of the taxpayer is deductible by the taxpayer as alimony and taxable to the former spouse as income.

    a) True
    b) False
    b) False

    Although a divorce decree sometimes allows the custodial spouse and children rent-free occupancy of the family home, the value of a similar rental is not treated as alimony.
  6. When a former husband is obligated to pay child support for a minor child, he may deduct those amounts as alimony.

    a) True
    b) False
    b) False

    Child support does not constitute alimony for tax purposes and is not deductible to the payer-spouse.
  7. When a former husband names his wife revocable beneficiary of a life insurance policy on his life but retains ownership of the policy and pays the premiums, the value of the premiums is tax deductible by him and includible in the wife's income as additional alimony.

    a) True
    b) False
    b) False

    When a former husband retains a life insurance policy and merely names his wife revocable beneficiary, he has retained all economic rights and benefits of the policy. Therefore, although he pays the premiums, the premium payments are neither deductible by him nor taxable to the wife as alimony.
  8. An annuity provides for a systematic liquidation of a sum of money, including both principal and interest, over a period of time.

    a) True
    b) False
    a) True
  9. The exclusion ratio for either an annuity or “partial annuity” is calculated by dividing the investment in the contract by the expected return under the contract.

    a) True
    b) False
    a) True
  10. The amount of each annuity payment is multiplied by the applicable exclusion ratio to determine the portion of the payment that is not taxable.

    a) True
    b) False
    a) True
  11. A refund feature in an annuity allows the annuitant to receive back his or her full investment in the contract before any portion of the annuity payments is taxed.

    a) True
    b) False
    b) False

    A refund feature provides that, if the annuitant dies before receiving a stated number of payments or a specified amount of payments, remaining payments will be made to a specified beneficiary.
  12. The actuarial value of a refund feature in a life annuity must be subtracted from the taxpayer's investment in the contract before the exclusion ratio can be computed.

    a) True
    b) False
    a) True
  13. For a taxpayer who owns a deferred annuity, all amounts withdrawn before the starting date are received tax free.

    a) True
    b) False
    b) False

    A withdrawal of investment amounts from deferred-annuity contracts prior to the annuity starting date will generally cause immediate income taxation to the extent the cash surrender value exceeds the investment in the contract. (Different rules apply to annuities funded before August 14, 1982.) There is also a 10 percent penalty tax on any taxable amount withdrawn prior to the annuity starting date if the taxpayer has not reached age 59 1/2, subject to certain exceptions.
  14. In general, an employer's contributions for employee group term insurance coverage are not deductible by the employer.

    a) True
    b) False
    b) False

    Employer contributions for employee group term coverage are generally deductible by the employer.
  15. When group term life insurance is provided as part of an employer plan of group insurance, the cost of coverage up to $75,000 is not taxable to an insured employee.

    a) True
    b) False
    b) False

    An insured employee may exclude the value of premiums representing the first $50,000 of coverage if certain nondiscrimination rules are met.
  16. A group life insurance plan might be found to be discriminatory in favor of key employees with regard to either eligibility or benefits.

    a) True
    b) False
    a) True
  17. A group insurance plan that covers fewer than 10 full-time employees must provide a flat amount of coverage to each employee.

    a) True
    b) False
    b) False

    A group plan that covers fewer than 10 employees may provide either a flat amount of coverage, a uniform percentage of salary, or an amount based on certain employee classifications.
  18. Restricted stock is stock that a corporation sets aside for a key employee who cannot receive it before age 65, or age 55 if he or she takes early retirement.

    a) True
    b) False
    b) False

    Restricted stock is stock that is given or sold at a reduced price to an employee and is subject to provisions which involve a substantial risk of forfeiture.
  19. An employee who has been given restricted stock is generally required to include the value of the stock in gross income when the restrictions are no longer in effect.

    a) True
    b) False
    a) True
  20. An employee who receives restricted stock may elect to have the value of the restricted property taxed immediately, even though the property is subject to a substantial risk of forfeiture.

    a) True
    b) False
    a) True
  21. When restricted property becomes taxable, the employee will recognize income to the extent of the fair market value of the property reduced by the amount the employee paid for the property, if any.

    a) True
    b) False
    a) True
  22. An employer maintains a group term life insurance plan for its employees. A nonkey employee, aged 60, is provided with $100,000 worth of coverage. Using the Uniform Premium Table I, the cost of $1,000 of protection per month in his age bracket is $.66. If the employee contributes $200 annually toward the cost of the coverage, what amount will be included in the employee's gross income?

    A) $0
    B) $396
    C) $792
    D) $196
    D) $196

    Premiums for the first $50,000 of coverage are tax free to the employee. The Table I cost for the excess coverage ($50,000) is taxable to the extent that it exceeds the employee's contribution. Here, this Table I cost is $396 per year (.66 x 12 x 50). Therefore $196 is taxable to the employee ($396 - $200).
    (this multiple choice question has been scrambled)
  23. An executive bought 100 shares of his employer's stock for $2,000 on July 1 of this year. These shares are nontransferable and he must return them if he leaves the corporation. However, for each year he remains, 20 shares do not have to be returned. If the fair market value is $40 per share on July 1 of next year, the executive will have ordinary income next year of

    A) $400
    B) $800
    C) $2,000
    D) $4,000
    A) $400

    The executive has a basis of $20 per share ($2,000 / 100). Their value when the restriction lapses is $40 per share. Therefore the executive has income of $20 per share ($40 - $20), for a total of $400 ($20 x 20 shares).
    (this multiple choice question has been scrambled)
  24. Robert and Susan were just divorced. In accordance with the decree, he is paying her $1,000 per month as alimony and $600 per month for support of their twins, aged 5. How much of each monthly payment of $1,600 is allowed as a deduction from Robert's gross income?

    A) $1,600
    B) $1,000
    C) $0
    D) $600
    B) $1,000

    Only the $1,000 alimony portion of Robert's payments is deductible.
    (this multiple choice question has been scrambled)
  25. Which of the following statements correctly describes the option available to an annuitant if, in a given year, the annual payment from a variable annuity is $400 less than the annuitant's annual excludible amount?

    a) The annuitant may use the $400 difference to offset other taxable income for the year in which the above annuity payment was received.

    b) The annuitant may use the $400 difference to reduce his investment in the contract in the year following the one in which the above annuity payment was received.

    c) The annuitant may recalculate his exclusion ratio for tax purposes for the year in which the above annuity payment was received.

    d) The annuitant may recalculate his excludible amount beginning with payments to be received in the year following the one in which the above annuity payment was received.
    d) The annuitant may recalculate his excludible amount beginning with payments to be received in the year following the one in which the above annuity payment was received.

    In the case of a variable annuity, the annuitant may recalculate the exclusion ratio with respect to future payments if he or she receives a payment that is less than the currently excludible amount.
  26. Which of the following statements concerning the tax implications of a divorce is (are) correct?

    I. Excess alimony payments are fully taxable to the recipient.

    II. Cash payments for child support provided in the divorce decree are tax deductible.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    D) Neither I nor II

    I is incorrect because the recipient of excess alimony payments receives a deduction for such payments in the third postseparation year.

    II is incorrect because child support payments are not deductible.
    (this multiple choice question has been scrambled)
  27. Which of the following statements concerning taxation of an annuity purchased this year is (are) correct?

    I. A portion of annuity payments received will be tax free as a return of capital for as long as the annuitant lives, regardless of how long.

    II. A gift of an annuity contract can result in a taxable event for the donor at the time of the gift.

    A) Both I and II
    B) I only
    C) II only
    D) Neither I nor II
    C) II only

    I is incorrect because the tax-free amount recoverable for an annuity purchased this year is limited to the individual's investment in the contract. Once the investment in the contract is fully recovered, the full amount of each annuity payment is taxable.
    (this multiple choice question has been scrambled)
  28. All the following statements concerning the use of life insurance in the context of a divorce settlement are correct EXCEPT

    a) An existing cash value policy transferred by one spouse to the other results in taxable income to the recipient spouse.

    b) If one spouse owns a policy and the other spouse pays the premiums after the divorce, the premium payments are generally treated as alimony.

    c) If one spouse owns the policy, pays the premiums, and names the other spouse as beneficiary, the premiums are not deductible.

    d) Death benefits paid under policies used in divorce settlements will generally be free of income tax.
    a) An existing cash value policy transferred by one spouse to the other results in taxable income to the recipient spouse.

    Such a transfer will not result in a taxable event.
  29. All of the following are requirements for the payer to receive an income tax deduction for alimony payments EXCEPT:

    A) The payments cannot represent child support.
    B) The payments must cease with the death of the payer.
    C) The payments must be made in cash or a cash equivalent.
    D) The ex-spouses must maintain separate households.
    B) The payments must cease with the death of the payer.

    To qualify as deductible alimony, the payments must cease at the death of the recipient.
    (this multiple choice question has been scrambled)
  30. Which of the following statements is correct regarding payments in connection with separation or divorce?

    A) The front-loading rules for excess alimony do not apply if either spouse remarries before the end of the third post-separation year.
    B) Cash payments for child support provided in the divorce decree are included in the gross income of the recipient.
    C) Excess alimony payments must be recaptured by the payer equally during each of the first three years after a divorce.
    D) Rent-free occupancy of a residence by one spouse may be treated as alimony for income tax purposes.
    A) The front-loading rules for excess alimony do not apply if either spouse remarries before the end of the third post-separation year.

    Child support payments are not deductible by the payer, and as a result are not taxable to the recipient.

    Excess alimony payments must be recaptured by the payer in the THIRD year after a divorce.

    To qualify as alimony for income tax purposes, the payments must be made in cash.
    (this multiple choice question has been scrambled)
  31. hich of the following statements is/are correct regarding the use of life insurance in the context of a divorce?

    I. An existing cash value policy transferred by one spouse to the other will not result in taxable income to the recipient spouse.

    II. If one spouse owns the policy, pays the premiums, and names the other spouse as
    beneficiary, the premiums are generally treated as alimony.

    A) Neither I nor II.
    B) Both I and II.
    C) Only I.
    D) Only II.
    C) Only I.

    II is incorrect. The policy must be transferred to the recipient spouse for premiums to be deductible.
    (this multiple choice question has been scrambled)
  32. Tom and Randi were just divorced. In accordance with their divorce decree, Tom will pay Randi $3,000 per month. When their son attains age 18 in five years, the payments will drop to $1,900 per month.

    How much of each monthly payment of $3,000 will be included in Randi's gross income for federal income tax purposes?

    A) $1,100.
    B) $0.
    C) $3,000.
    D) $1,900.
    D) $1,900.

    Child support payments are not deductible by the payer and are not included in the gross income of the
    recipient. If a payment pursuant to a divorce will decrease when a child attains a certain age, the decrease in the payments is considered child support. Therefore, only the $1,900 is considered alimony for income tax purposes.
    (this multiple choice question has been scrambled)
  33. Which of the following statements is/are correct regarding payments in connection with a divorce?

    I. Child support payments made after a divorce are deductible by the payer.

    II. If alimony payments are deductible by the payer, a corresponding amount of income will be taxable to the recipient.

    A) Only I.
    B) Both I and II.
    C) Only II.
    D) Neither I nor II.
    C) Only II.

    I is incorrect. Although alimony is deductible by the payer, child support payments are not deductible.
    (this multiple choice question has been scrambled)
  34. Which of the following payment streams would result in excess alimony that would be recaptured by the payer?

    a) Year 1 - $40,000,
        Year 2 - $50,000
        Year 3 - $70,000
    b) Year 1 - $70,000
        Year 2 - $50,000
        Year 3 - $50,000
        Year 4 - $30,000
        Year 5 - $65,000
    c) Year 1 - $40,000
        Year 2 - $50,000  
        Year 3 - $35,000
        Year 4 - $10,000
        Year 5 - $10,000
    d) Year 1 - $60,000
        Year 2 - $50,000
        Year 3 - $40,000
    b) Year 1 - $70,000    Year 2 - $50,000    Year 3 - $50,000    Year 4 - $30,000    Year 5 - $65,000

    Alimony recapture can only occur if the payments drop by more than $15,000 from year 1 to year 2, or year 2 to year 3. In this scenario, the payment from year 1 to year 2 drops by $20,000, resulting in alimony recapture in the third year. Years 4 and 5 are ignored for recapture purposes.

    Alimony recapture can only occur if the payments drop by more than $15,000 from year 1 to year 2, or year 2 to year 3. Alimony recapture does not apply when payments increase in both years.

    Alimony recapture can only occur if the payments drop by more than $15,000 from year 1 to year 2, or year 2 to year 3. In this scenario, the payment drops by exactly $15,000 from year 2 to year 3, which does not result in alimony recapture. Years 4 and 5 are ignored for recapture purposes.

    Alimony recapture can only occur if the payments drop by more than $15,000 from year 1 to year 2, or year 2 to year 3. In this scenario, the payments drop by $10,000 from year 1 to year 2, and$10,000 from year 2 to year 3. This does not result in alimony recapture.
  35. Which of the following statements is/are correct regarding the use of life insurance in the context of a divorce?

    I. The transfer of life insurance pursuant to a divorce will cause the subsequent payment of the death benefit to be subject to income taxes due to the transfer-for-value rule.

    II. If a cash value life insurance policy is transferred pursuant to a divorce, subsequent premiums paid by the transferor are tax deductible and the recipient must report premiums as taxable
    income.

    A) Neither I nor II.
    B) Only II.
    C) Only I.
    D) Both I and II.
    B) Only II.

    I is incorrect. Transfers of life insurance pursuant to a divorce are not subject to the transfer-for-value rule.
    (this multiple choice question has been scrambled)
  36. All of the following statements are correct regarding the taxation of an annuity EXCEPT: 

    A) If an annuitant dies before recovering his or her basis, they will receive an income tax deduction on their final income tax return.
    B) If the annuity contract was entered into before 1985, the annuity payments will be treated as part capital gain and part return of capital.
    C) If an annuitant lives beyond his or her table life expectancy, annuity payments received will be fully taxable as ordinary income. 
    D) An annuity contract owned by a corporation will not be eligible for tax-deferred accumulation.
    B) If the annuity contract was entered into before 1985, the annuity payments will be treated as part capital gain and part return of capital.

    Annuity payments received are never taxed at capital gain rates. The taxable portion of each annuity payment is always taxed at ordinary income tax rates.
    (this multiple choice question has been scrambled)
  37. Which of the following is/are options available to an annuitant if, in a given year, the payment received from a variable annuity is less than the annuitant's annual excludible amount?

    I. The annuitant can recalculate the excludable amount beginning with payments received in the following year.

    II. The annuitant can claim an immediate income tax deduction for the difference between the actual payment and the excludible amount.

    A) Only I.
    B) Both I and II.
    C) Only II.
    D) Neither I nor II.
    A) Only I.

    II is incorrect. If the actual annuity payment is less than the excludible amount, the annuitant will not be entitled to an income tax deduction in the current year.
    (this multiple choice question has been scrambled)
  38. anice, age 61, decided to take a withdrawal from her annuity before the annuity start date. Which of the following statements is correct regarding Janice's decision?

    A) If the contract was entered into in 1986, the FIFO basis recovery rule will apply.
    B) Her withdrawal will be taxed at capital gains rates.
    C) Janice will be subject to a 10% early withdrawal penalty.
    D) If Janice completely surrenders her annuity, she can reduce the taxable amount by any surrender charges.
    D) If Janice completely surrenders her annuity, she can reduce the taxable amount by any surrender charges.

    The 10% early withdrawal penalty will not apply because she is older than age 5914.

    The annuity will be taxed at ordinary income tax rates.

    Contracts entered into after August 13, 1982 are taxed based on the LIFO basis recovery rule.
    (this multiple choice question has been scrambled)
  39. If an annuity is owned by a non-natural person, the annuity will be taxed each year to the contract owner. Which of the following forms of annuity contract ownership would be considered a non-natural person?

    A) A contract owned by corporation with one shareholder.
    B) A contract owned by an individual retirement account (IRA).
    C) A contract owned by a trust with one beneficiary. 
    D) A contract owned by the estate of a deceased annuity owner.
    A) A contract owned by corporation with one shareholder.

    An annuity owned by a corporation, partnership, and certain trusts are considered owned by a non- natural person. A trust with only one beneficiary is not considered a non-natural person.
    (this multiple choice question has been scrambled)
  40. Which of the following statements is/are correct regarding the gifting of annuity contracts?

    I. The gift of an annuity contract will never result in a taxable event for the donor.

    II. Transfers of annuity contracts for less than adequate consideration can result in gift tax problems as well as income tax problems.

    A) Neither I nor II.
    B) Only II.
    C) Both I and II.
    D) Only I.
    B) Only II.

    I is incorrect. If an annuity contract is gifted after April 22, 1987, the gifting of the annuity contract will be taxable to the donor, based on the excess of the cash value of the contract over the investment in the contract.
    (this multiple choice question has been scrambled)
  41. Which of the following statements is/are correct regarding the gifting of annuity contracts?

    I. The gift of an annuity contract will never result in a taxable event for the donor.

    II. Transfers of annuity contracts for less than adequate consideration can result in gift tax problems as well as income tax problems.

    A) Both I and II.
    B) Neither I nor II.
    C) Only I.
    D) Only II.
    A) Both I and II.

    The tax-free portion of an annuity payment is determined by calculating the exclusion ratio.

    The exclusion ratio is determined using the following formula: Exclusion ratio = Investment in the Contract / Expected Return Under the Contract
    Exclusion ratio = $200,000 / $500,000
    Exclusion ratio = 40%
    Therefore, the tax-free portion of the annuity payment is $8,000 ($20,000 annuity payment x 40% exclusion ratio).

    Since Tommy's life expectancy is 25 years, and he will receive $20,000 per year, theexpected return under the contract is $500,000 ($20,000 annual payment x 25 years). Tommy's INVESTMENT in the contract is $200,000.

    The exclusion ratio is 40%.

    The taxable portion of the annuity payment is $12,000 ($20,000 annuity payment less$8,000 tax-free portion).
    (this multiple choice question has been scrambled)
  42. All of the following statements are correct regarding Section 79 group term life insurance coverage EXCEPT:

    A) Life insurance benefits can be based upon a percentage of each employee's compensation, up to the IRS annual limit.
    B) The plan can be offered as part of a cafeteria plan.
    C) The cost of the first $50,000 of coverage is not taxed to the employee.
    D) If the plan is discriminatory, the employer will lose their income tax deduction for premiums paid on behalf of key employees.
    D) If the plan is discriminatory, the employer will lose their income tax deduction for premiums paid on behalf of key employees.

    If the plan is discriminatory, key employees will lose the $50,000 exclusion, and will be taxed on coverage over $50,000 based on the GREATER of IRS Table I or actual cost.
    (this multiple choice question has been scrambled)
  43. Which of the following statements is/are correct regarding Section 79 group term life insurance plans?

    I. If a plan covers less than 10 full-time employees, coverage must be based on a uniform percentage of salary.

    II. Death benefits paid from the plan in excess of $50,000 will be taxable to the beneficiary.

    A) Only II.
    B) Neither I nor II.
    C) Only I.
    D) Both I and II.
    B) Neither I nor II.

    I is incorrect. If a group insurance plan covers less than 10 full-time employees, coverage can be based on a uniform percentage of salary, a flat dollar amount, or an amount based on employee staff classification.

    II is incorrect. Although the cost of coverage exceeding $50,000 is generally taxable to the employee each year, at the time of the employee's death, any lump sum death benefit paid to the beneficiary is generally income tax free.
    (this multiple choice question has been scrambled)
  44. All of the following are requirements for group term life insurance to qualify under Section 79 EXCEPT:

    A) The insurance must provide a death benefit that is not included in gross income for federal income tax purposes.
    B) The plan must preclude individual selection of coverage amounts.
    C) The employer must bear the cost of the insurance.
    D) The insurance must be provided to all employees, or determined on the basis of age, marital status, or other employment-related factors.
    C) The employer must bear the cost of the insurance.

    The insurance can qualify under Section 79, even if the employee pays some or all of the cost.
    (this multiple choice question has been scrambled)
  45. All of the following are requirements for group term life insurance to qualify under Section 79 EXCEPT:

    A) The insurance must provide a death benefit that is not included in gross income for federal income tax purposes.
    B) The insurance must be provided to all employees, or determined on the basis of age, marital status, or other employment-related factors.
    C) The employer must bear the cost of the insurance.
    D) The plan must preclude individual selection of coverage amounts.
    D) The plan must preclude individual selection of coverage amounts.

    The premiums paid are not deductible.
    (this multiple choice question has been scrambled)
  46. An employer maintains a nondiscriminatory group term life insurance plan for its employees. An employee, aged 56, is provided with $200,000 worth of coverage. The cost of $1,000 of protection per month in his age bracket is 43 cents.

    If the employee contributes $350 annually toward the cost of the coverage, what amount will be included in the employee's gross income?

    A) $0
    B) $774
    C) $424
    D) $258
    C) $424

    The excess coverage is $150,000 ($200,000 less $50,000).
    The tax on this coverage is:

    Excess Coverage                   150
    Cost per $1,000 of coverage x.43
    Monthly Cost of Coverage $64.50
    Multiply x12                            x12
    Annual cost of coverage $774
    Less: employee contribution (350)
    Taxable Amount                $424
    (this multiple choice question has been scrambled)
  47. Stacy received stock from her employer in exchange for services performed. Which of the following statements is/are correct regarding this arrangement?

    I. Her employer will receive an income tax deduction when Stacy sells her stock.

    II. Stacy will be taxed on the stock when she no longer has a substantial risk of forfeiture.

    A) Neither I nor II.
    B) Both I and II.
    C) Only I.
    D) Only II.
    D) Only II.

    I is incorrect. The employer will receive a deduction when Stacy is taxed at ordinary income tax rates. This would occur when Stacy no longer has a substantial risk of forfeiture, or immediately if Stacy makes a Section 83(b) election.
    (this multiple choice question has been scrambled)
  48. A restricted stock plan would be appropriate for all of the following employers EXCEPT:

    a) Employers wanting to provide its executives with an equity-based form of compensation.
    b) expand company ownership to outsiders. c) Publiciy-traded corporations wanting to attract talented executives.
    d) Employers wanting to discourage certain specified conduct, such as working for a competitor.
    b) expand company ownership to outsiders. c) Publiciy-traded corporations wanting to attract talented executives.

    If the business owners do not want to expand the ownership of the business to outsiders, a restricted stock plan would not be appropriate. Other types of compensation would be more appropriate in this situation, such as a bonus plan or another non-equity-based compensation plan.
  49. In the case of a restricted stock plan, a "substantial risk of forfeiture" will exist when the stock must be returned to the employer if:

    A) The employee, who is a majority shareholder of the employer company, goes to work for a competing company.
    B) The employee is fired for committing a crime.
    C) The employee is retiring but is required under the agreement to provide three hours of consulting services for the next two years.
    D) The earnings of the employer company do not increase by a certain percentage.
    D) The earnings of the employer company do not increase by a certain percentage.

    If stock must be returned as a result of the performance of the company, a substantial risk of forfeiture exists.

    A substantial risk of forfeiture does not exist if the only restriction on the stock is that the former employee perform consulting services for the employer, and the services are not substantial.

    A substantial risk of forfeiture does not exist if the only restriction on the stock is that it must be returned if the employee is discharged for cause (such as committing a crime).

    A substantial risk of forfeiture does not exist if the only restriction on the stock is a majority shareholder must return the stock if he or she works for a competing company. It is unlikely that a majority shareholder would work for a competitor, and therefore no substantial risk exists.
    (this multiple choice question has been scrambled)
  50. Mutrix Corporation transferred 100 shares of Mutrix stock to employee Todd Parker at no cost. The stock agreement stipulated that if Todd committed a crime such as embezzlement within six years after the transfer, he would be terminated and required to return the stock to the company.

    Two years after the transfer, Todd became disabled and was unable to work for six months. He returned to Mutrix after the disability, and remained with the company for four additional years before retiring.

    The value of the stock was as follows:
    • Value on date of original transfer - $10 per share.
    • Value when disability commenced - $15 per share
    • Value six years after transfer - $20 per share
    • Value on date of retirement - $25 per share

    Assuming no special elections were made, what is the amount of gross income inclusion required by Todd as a result of this arrangement?

    A) $1,500 will be included in his gross income at the time of his disability.
    B) $2,500 will be included in his gross income at the time of his retirement.
    C) $1,000 will be included in his gross income on the date of the transfer.
    D) $2,000 will be included in his gross income six years after the transfer.
    C) $1,000 will be included in his gross income on the date of the transfer.

    Restricted stock is included in the employee's gross income when the stock is no longer subject to a substantial risk of forfeiture. In this scenario, Todd will be required to return the stock to the employer if he commits a crime. Treasury Regulations indicate that discharges for cause, such as committing a crime, are NOT considered a substantial risk of forfeiture. Therefore, Todd does not have a substantial risk of forfeiture, and will be taxed immediately upon receipt of the stock, based on the fair market value of the stock.
    (this multiple choice question has been scrambled)
  51. Which of the following statements is/are correct regarding the Section 83(b) election applicable to restricted stock?

    I. If the election is made and the stock value declines, the employee may take a loss deduction when the restriction lapses.

    II. A Section 83(b) election is most appropriate if the employee believes income tax rates will decline significantly in the future.

    A) Neither I nor II.
    B) Only II.
    C) Both I and.II.
    D) Only I.
    A) Neither I nor II.

    I is incorrect. One disadvantage of the Section 83(b) election is that if the stock loses value during the restriction period, the employee cannot take a loss.

    II is incorrect. The Section 83(b) election causes
    recognition of income at the time the restricted stock is transferred to the employee. Therefore, if ordinary tax rates are expected to decline in the future, it may not make sense to make the Section 83(b) election and pay the taxes up front.
    (this multiple choice question has been scrambled)

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