From Final Danko Quizzes Flashcards
When, if ever, can a corporation that issues qualified stock options (ISOs) receive a tax
deduction for the ISO
C. Yes, if the ISO is disqualified
If the stock that was acquired under the option (right to buy) is sold before the two year
/one year holding period, the excess of the fair market value of the shares at the time of
exercise over the exercise price is treated as compensation to the option holder. That creates a
corresponding deduction for the issuing corporation.
6. Following the death of the grantor (trustmaker) which of the following strategies should be the most effective to reduce GSTT? A. An irrevocable trust B. A revocable trust C. A reverse QTIP D. A dynasty trust
C. The decedent can still use the GSTT exemption when the reverse QTIP is elected by the
executor (after death). The dynasty trust is generally implemented before death.
When you met with John and Jodi Adams for your regular monitoring meeting, they provided
you with information about new developments in their lives. After you congratulate them they
ask you to help them prioritize the reasons for making changes to the original financial plan that
you wrote for them. How would you rank the changes listed below in order of importance from
highest to lowest?
I. They inherited money from Jody’s mother
II. Jody is expecting a second child in 2 months
III. John just received new job promotion which entails a move to an adjacent state (50
miles away).
IV. The adjacent state has a high state income tax
A. I, II, III, IV
B. II, III, IV, I
C. III, I, IV, II
D. IV, II, I, III
A. Identify the most important and the least important reasons to modify the original plan.
The Adams’s will need a plan for the inherited money. The state level income tax differential is
likely to be small. If the Adams’s itemize, it may produce an itemized deduction. Because the
new baby is a second child, they have already considered the financial planning that
accompanies parenting. (In ranking questions, identifying the “most” and “least” generally
leads you to the answer: The middle choices are often too similar to differentiate.
Your client, Dennis Hart explains to you that he wants a reasonable level of income but also some
long-term growth. If you believe that he can address both of his investment objectives, which of the
following securities would you suggest to Dennis?
A. Convertible bonds
B. Preferred stocks
C. Blue chip stocks
D. Corporate commercial paper
A. Most logical investors will accept a lower interest rate in exchange for the potential price
appreciation from converting the bond if the prices of the issuers’ stocks rise above the bond’s
conversion price. Preferred stock is regarded as a fixed income investment with little growth
potential. Many blue-chip stocks distribute small dividends and they can be skipped in a profit-less
year.
Smokestack Inc. voluntarily terminated its defined benefit plan. Your client, Homer Connors, age 61,
has been a long-time employee of Smokestack, Inc. and a participant in this pension. The “termination”
has made Homer quite anxious. What might you tell Homer that may make him feel less anxious?
A. The 10% penalty (59-1/2 year rule) will not apply to distributions.
B. The account balance must be rolled over into an IRA account.
C. Homer is 100% vested.
D. The plan is fully funded. There is no need to worry.
C. The 10% penalty will not be imposed on Homer because he is over age 59½ and is a possible
answer. The plan is fully funded at normal retirement age, not necessarily at a premature termination.
Homer would get the account balance that is attributable to him and be fully vested.
Your client, Jane Thompson is divorced. Her ex-husband Alex Thompson is now remarried to Lola,
age 25. Lola is an exotic dancer. Since he married Lola, Alex has been a bit tardy on making alimony
payments. Jane wants you, her financial planner, to meet with Alex. Jane is willing to pay for your
services and Alex is willing to meet with you. What should you do?
A. Tell Jane that you cannot meet with Alex because there is a conflict of interest.
B. If you do see Alex, do not discuss Jane’s financial affairs with him.
C. Tell Jane that Lola needs to be included in the conversation.
D. Tell Jane that the best solution is to refer Alex to another financial planner.
D. Tell Jane that the best solution is to refer Alex to another financial planner.
Jane and Alex want help but you don’t want to be in an awkward situation. Answer D does
provide help regarding the situation. Lola is not a party to the alimony agreement between Jane and
Alex
Bill, a CPA, charges his clients a fee when he prepares their income tax returns. If the client is in a
high tax bracket, he advises them to invest in municipal bonds and tax deferred annuities. Which of the
following should Bill do?
A. Register as an investment advisor
B. Obtain a securities license (series 7)
C. Do both A and B
D. Continue to make investment suggestions when appropriate.
D. The advice is incidental to the CPA’s occupation. He isn’t selling any products (prepares taxes)
- Luke recently inherited a parcel of land. Many years ago his parents purchased the land for $10,000.
At the time of his inheritance, it had a FMV of $100,000. Today, it is worth $200,000. The Insurance,
taxes, and maintenance are costing Luke more than the land is appreciating. He is considering various
alternatives. Which of the following is true?
A. A local public charity wants to hold various activities (fairs, etc.) on the land (rent free). Luke
feels that he could claim the use of the land as a charitable deduction.
B. If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 50%
of his AGI in the current tax year.
C. If he gifts the land to the local charity (public), he can deduct its value ($200,000) up to 30%
of AGI in the current tax year.
D. If he gifts the land to the local charity (public), it is use unrelated. Thus, his current year
charitable income tax deduction is limited to the basis $100,000 and 50% of his AGI.
C. The charitable income tax deduction for gifts of long-term capital gain property is limited to 30%
of AGI. A gift to charity of rent-free use of space will not entitle the donor to a charitable deduction.
Land, by nature is use-related. Only artwork and other collectibles can be use-unrelated relative to the
charitable income tax deduction.
- Which of the following benefits are generally provided through workers compensation?
I. Disability income benefits
II. Rehabilitation benefits
III. Tax-free benefits
IV. Sick pay benefits
A. I, II, III B. I, II, IV C. I, III D. II, III, IV E. IV
A. Workers compensation benefits generally include medical care, disability income, death benefits,
and rehabilitation benefits. Benefits are received tax-free. Sick pay would be a benefit provided by an
employer directly.
A CFP® certificant offers advice on specific mutual funds and charges a fee for this advice. Which of
the following is true?
A. The CFP® certificant can distribute a business card printed with both CFP® and RIA following
her name.
B. If the CFP® certificant is securities licensed (Series 7), the licensee will not have to register as
a registered investment adviser.
C. If the CFP® certificant is an Investment Adviser Representative, then the licensee will not
have to register individually.
D. The CFP® certificant will not have to complete additional registrations.
C. The CFP ®certificant will have to register individually as an adviser or as an Investment Adviser
Associate through an advisory firm.
- Harry and Pat Nelson (highest tax bracket, married, filing jointly) have a daughter, Pam age 12. As of
today they have failed to save for Pam to attend a 4-year university. Under the circumstances, which of
the following investments makes the most sense and why?
A. A series of taxable zero coupon bonds owned by Pam (UTMA account) because they can
provide the right amount of money when it will be needed and would be taxed at Pam’s tax
rate
B. A S&P 500 Index fund owned by Pam (UTMA account) because it generally provides the
highest inflation-adjusted return and is taxed at long-term capital gains rates
C. A series of laddered CDs owned by Harry and Pat because they can provide appropriate
funds at correct times and have virtually no principal risk.
D. A single premium variable life insurance policy on Pam’s life because growth is tax-deferred
and Pam can remove funds as needed for college through policy loans.
B. Consider the relatively short time horizon. The time horizon for this question could be 6-10 years.
Also consider the advantage to paying low taxes. The S&P 500 index fund will be tax efficient and
probably grow. Yes, kiddie tax could apply, but the ultimate tax rate would be a maximum of 20%
(dividends and capital gains) rather than as ordinary income.
Answer A is wrong because the zero coupon bonds produce phantom income. You may have picked A as
an answer. NOTE: I think that if the time horizon to college was 4 years, then A or C could have worked.
This is the best answer and somewhat subjective.
Answer C is wrong because the CD earnings will be taxed at parents rates rather than Pam’s over $2,200.
Answer D is wrong because distributions will be taxable (MEC) and subject to a 10% penalty
Sally donates several bags of old clothes to the Salvation Army. Which statement below best reflects
the documentation that Sally would need in order to claim a charitable income tax deduction?
A. Deduction of up to $250 does not require a receipt.
B. Deduction of $250 but less than $1,000 must be documented.
C. The deduction is the lesser of fair market value or the donor’s basis (substantiated).
D. The deduction is limited to basis (unsubstantiated).
C. For charitable gifts of less than $250, a dated receipt is proof for purposes of an income tax
deduction. The receipt should include a description of the property. A written receipt would list the
items donated with a corresponding value. Sally should keep records showing the fair market value and
her cost basis. For charitable gifts exceeding $250 Sally must substantiate the deduction by written
acknowledgement from the charity. Cash donations up to $300 single/$600 joint do not have to be
documented for 2021 if you take the standard deduction.
A CFP® certificant may generally be found liable (or negligent) in which of the following occurrences?
I. Divulging confidential information about a client to the IRS in response to a subpoena
II. Not addressing property and casualty insurance coverage in a comprehensive
financial plan
III. Not preparing the financial plan as promised in the planning agreement
IV. Not reviewing advice prepared by his/her paraplanner
A. II, III, IV B. II, IV C. III D. IV E. All of the above
A. A CFP® certificant must respond to an IRS subpoena. The other situations indicate questionable
behavior
- Todd is the CFO for a 20 person insurance company, XYZ Inc. Due to two employees who had to go
out on medical leave, XYZ Inc. is considering disability benefits. XYZ, Inc. received two proposals from a
disability insurance carrier. The first is that each employee will have an individual policy with a
maximum benefit of 50% of salary capping at or $5,000 per month. The second is a group policy. The
insurance company provided an explanation of the difference to the employees. Because the individual
policies have more liberal definitions of total disability and base premiums on the age of the insured,
XYZ management has indicated that there is a maximum premium they will pay per month. Todd’s
illustration indicates he would have to pay about 30% of the premium for the individual policy. How
would you analyze his situation and help him make a recommendation for XYZ?
I. Under the individual plan if he was disabled, 30% of the benefits would be tax-free.
Under the group, all the benefits would be taxable. Thus, he should elect an individual
plan.
II. Under the group insurance, XYZ would pay the entire premium. Although the
benefits would be taxable, he has a low probability of being disabled. He should choose
the group plan.
III. Under the individual plan he would get a more liberal definition of total disability.
This is the most important consideration when buying a disability policy. He should
elect an individual plan.
IV. The group plan would entail simpler underwriting. The individual plan would subject
Todd to financial and medical underwriting. He should elect the group plan.
A. I, III
B. I and IV
C. III, and IV
D. II
A. Although the premium for the individual policy would come from Todd’s pocket, the individual
policy would provide a more generous definition of total disability and produce partially tax-free
benefits.
- Dr. McGillicutty, a 50-year-old divorced dentist, has incorporated his practice as a personal service
corporation. He is interested in increasing employee retention. He has approached you with the
following for the new tax year. Dr. McGillicutty’s corporation currently provides a 401(k) plan. The
practice only matches $.50 on a dollar of elective deferral up to 3% of eligible compensation. As a result
of this formula and employee turnover, the doctor has been limited in the amount he can contribute as
a key employee. If he elects to adopt a pension plan in lieu of the 401 (k), which of the statements is
true regarding his benefits?
A. He will be able to contribute 25% of his salary if he elects a money purchase plan.
B. He will be able to deposit $230,000 (2021) if he elects a defined benefit pension plan.
C. The money purchase and defined benefit plan will be covered by the PBGC.
D. If he elects a defined benefit plan and becomes concerned about guaranteeing benefits, the practice
could later switch to a cash balance plan.
E. Money purchase and profit-sharing plans are subject to the minimum funding standards.
D. If the doctor adopts a defined benefit plan then has concerns about guaranteed benefits, the
practice can switch to a cash balance plan. Profit sharing (401k) plans are not subject to the
minimum funding standard. Money purchase has a contribution limit of $58,000 (2021). Without
his salary being given this statement, this statement could be false. In answer B, the statement
uses the word deposit rather than benefit. $230,000 is the maximum benefit (2021)
An employer can self-fund certain benefits under a 501(c)(9) voluntary employees’ beneficiary
association (VEBA). Which of the following may be funded?
I. Death benefits
II. Medical benefits
III. Unemployment benefits
IV. Retirement benefits
V. Deferred compensation benefits
A. I, II, III, IV B. I, II, III C. I, II D. IV, V E. All of the above
B. Retirement and deferred compensation benefits may not be funded through a VEBA.
George Hallas owns 80% and his daughter, Georgina 20% of Hallas, Inc. (a corporation). Hallas,
Inc. grosses approximately $20 million in a typical year. George and his daughter also own a
general partnership worth $5 million. George owns a $3 million life insurance policy outright
under which he is the named insured. He wants to remove the life insurance policy from his
estate. What do you recommend?
A. Sell the policy to the corporation for buy-sell purposes.
B. Sell the policy to the partnership for buy-sell purposes.
C. Transfer the policy to the partnership for buy-sell purposes.
D. Gift the policy to his daughter.
D. If the corporation owns the policy, the proceeds may be considered in valuing the decedent’s
interest for federal estate tax purposes unless there is valid agreement fixing the price that would
reflect an arms-length sale to an unrelated party (questionable because the buyer and seller are
daughter and father, respectively. Answers B and C create a similar problem. When George dies
the partnership dissolves. The ownership of the policy after that point would be uncertain and
possibly flow through to George’s estate.
Baker, Inc. provides a qualified retirement plan (employer funded). The plan falls under
numerous ERISA rules. The plan lost 50% due to poor investment decisions in the previous
year. What recourse can the employees take?
A. Sue the plan officials for 100% of the investment losses.
B. Sue the plan officials for 50% of the 50% loss.
C. Do nothing: qualified plan investment managers are not required to make profits.
D. Sue the plan officials for 100% of the losses plus punitive damages
E. Sue the plan officials for losses to the plan
E. Errant plan officials can be held personally liable for losses to the plan as well as other factors.
ERISA prohibits monetary punitive damages for claims.
Coverdell Education Saving Plans permit tax free withdrawals for which of the following
qualified education expenses (including elementary and secondary education expenses) taxfree?
I. Academic tutoring II. Special needs services III. Books IV. Room and board V. Uniforms as required
A. None of the above B. All of the above C. II, III, IV D. I, II E. III
All these items are eligible for tax free withdrawals from Coverdell Education Savings Accounts.
These expenses may reflect both elementary and secondary education.
Childhood pals Stu and Lou had always wanted to spend time together, so shortly after
graduating high school, they opened a hamburger joint called Good Guys Burgers. The business
has been successful over the past forty some years and has grown into a chain of 33 stores. Stu
and Lou estimate that the business is worth $9 million and plan to engage a business valuation
specialist to peg an accurate fair market value for the business. Stu and Lou, now in their early
sixties, recently had their first discussion about business succession planning. Although Stu has a
son, Mark, in his late twenties, Mark tours with a rock band and has no interest in stepping into
his father’s shoes. Lou has no children and his wife has serious health problems so she could not
assume his business responsibilities if Lou dies. On the advice from their insurance agent, Lou
and Stu decide to enter into an insurance-funded cross purchase death buy/ sell agreement.
Each owner acquires life insurance on the other. If this agreement is executed and funded and
Lou dies, who, if anyone, would experience a stepped up basis relative to the buy/sell
transaction?
A. Lou only (estate)
B. Stu only
C. Both Lou’s estate and Stu
D. Neither Lou nor Stu
C. Both Lou’s estate and surviving owner Stu both experience basis step up. Lou’s estate gets an
increase in basis to date-of-death fair market value (unless the AVD was selected which is not
indicated in the data) due to the postmortem sale. Stu receives basis step up due to contributing
additional capital (the life insurance death benefit) to the business (Good Guys Burgers) to buy
out Lou’s equity in the business.
Holly, the daughter of Mr. and Mrs. Golightly, is going to college. She plans to get her Masters
at a state university. Unfortunately, due to economic conditions, her parents never set up a 529
plan or other education related arrangement. Holly may qualify for some state merit
scholarships. Her parents, both professionals, earn well over $80,000 each, but spend most of
what they make. Which of the following college tax and funding strategies may generate
federal income tax credits for undergraduate as well as graduate education?
A. American Opportunity Credit B. Lifetime Learning Credit C. Coverdell (ESA) D. PLUS E. None of the above
E. The American Opportunity Credit may be available for the undergraduate years, but not for
the graduate years. The Lifetime Learning Credit is subject to an AGI phaseout. The Coverdell ESA
and PLUS loans do not generate federal income tax credits.
Which of the following statements is true a regarding a QPRT if the grantor dies during the
retained-interest term?
A. The value of the remaining term will return to the grantor’s gross estate.
B. It leaves the grantor’s estate with no greater tax liability than had the QPRT had not been
established.
C. The applicable credit amount plus any gift tax actually paid on the original transfer are lost.
D. The present value of the retained income interest is brought back into the gross estate.
B. The full value of the home generally reflecting date of death FMV is brought back into the
gross estate. Let’s say you transferred a home worth $1 million under a 10-year QPRT. Had the
QPRT never been established the estate would have the same tax exposure because the property
would appear in the gross estate at FMV.
