Chapter 13

Question 1

Net Unrealized Appreciation Strategy

Answer 1

Only works with employer stock. Take the deferred stock and convert it to an after tax account. pay capital gains on the unrealized appreciation instead of income tax.

Question 2

Master Limited Partnerships can trade on a exchange like a stock?

Answer 2

True

Question 3

If an option contract expires worthless, the premium is a capital ______ to the ______ and a capital _____ to the ______.

Answer 3

Loss to the buyer and a capital gain to the writer.

Question 4

Taxation of municipal bonds

Answer 4

Usually exempt from the federal taxation but may be subject to state and local taxes.

Question 5

Taxation of Federal and Treasury Agency Bonds

Answer 5

Subject to Federal taxes but exempt from state and local taxes.

Question 6

Wash sale rule

Answer 6

Cannot deduct the loss on the sale of a security if the investor purchases a substantially identical security within a period beginning 30 days before the sale and ending 30 days after the sale.

Question 7

Tax Efficient Investing

Answer 7

Tax efficient investing is long term holding and not realizing capital gains.

• Can eventually lead to a concentrated portfolio.
• Can give the appearance of lack of management.

Question 8

Stock Dividend
Ordinary Dividend
Qualified Dividend

Answer 8

Stock Dividend - A non taxable event because every shareholder received something. Diluted the stock price.

Ordinary Dividend - Usually taxed at capital gains

Qualified Dividend - Taxed at ordinary income tax rate

Question 9

Capital Distribution vs Dividends

Answer 9

Capital Distributions - Paid from capital in the company. Investor has to reduce their cost basis. If cost basis is zero its taxed at capital gains tax rate.

Dividend - Paid from profit and taxed at ordinary income.