Practice Quiz 10

Question 1

Barrett is a project manager with an engineering firm. He has a consulting practice on the side and averages $40,000 per year from this business. He operates his business as a C corporation and has never received any salary or dividends. Which of the following statements is (are) CORRECT?

1. The corporation might be liable for an accumulated earnings tax.
2. The accumulated earnings tax is imposed only on a corporation that is seeking to avoid income tax on such earnings.

Answer 1

1 only

Question 2

Which of the following statements concerning short-term and long-term disability income plans is (are) CORRECT?

1. Short-term disability income contracts commonly contain a waiting period, which is the length of time a covered employee must be disabled before becoming eligible for benefits.
2. Long-term disability policies may include coverage for both sickness and accidents.

Answer 2

both are correct

Question 3

Carl has a life insurance policy on his own life that he wishes to gift to his nephew. If Carl gifts the life insurance policy to his nephew and pays any resulting gift tax on the gift, how much of the death benefit will be taxable to his nephew when Carl dies? The nephew will pay the insurance premiums after receiving ownership of the policy.
A)
Under the transfer-for-value rules, death benefits received in excess of Carl’s basis in the policy at the time of the gift are taxable to the nephew.
B)
Under the transfer-for-value rules, death benefits received in excess of Carl’s basis in the policy at the time of the gift and the premiums paid by the nephew are taxable to the nephew.
C)
The transfer of the life insurance policy as a gift from Carl will not result in a taxable death benefit for Carl’s nephew.
D)
The entire death benefit is taxable to the nephew.

Answer 3

C

Question 4

Which of the following are characteristics of a disability income insurance policy that is guaranteed renewable?

1. The right to renew is guaranteed.
2. The policy is noncancelable.
3. Renewal is solely at the insurer’s discretion.
4. The insurer has the right to increase premiums for the underlying class in which the insured is placed (not a single individual).

Answer 4

1 and 4

Question 5

Which of the following statements regarding a nonqualified Roth IRA distribution is NOT correct?

A)
A distribution from an inherited Roth IRA could be subject to income tax.
B)
A distribution that is made before the 5-year period may not be subject to the 10% penalty.
C)
Earnings will always incur a 10% penalty for that portion of the distribution.
D)
Conversion amounts may avoid the 10% penalty for the conversion portion.

Answer 5

C

Earnings are not always subject to the 10% penalty. Although the penalty would generally apply, there are exceptions under IRC Section 72(t) that may exclude the distribution from the penalty (such as proceeds used for qualified higher education costs or being older than 59½).

Question 6

Retirement plan participants who wish to take advantage of the plan’s loan provision must agree to which of the following restrictions on the amount of the loan and how it is repaid:

1. Generally, a participant may borrow no more than $50,000 or one-half of the vested account balance, whichever is less.
2. A participant’s loan must be repayable by its terms within 5 years, except if the loan is used to acquire a participant’s principal residence.
3. A participant is allowed to repay a loan on the last possible date and take out the maximum loan amount again immediately after repayment.

Answer 6

1 and 2

Question 7

Which of the following are characteristics of QTIP trusts?

1. The grantor is assured that trust assets will be received by the parties the grantor has designated.
2. The surviving spouse is usually given a general power of appointment over the trust property.
3. Protection is provided against a spendthrift surviving spouse.
4. Protection is afforded against the surviving spouse’s creditors during lifetime and at death.

Answer 7

1, 3, and 4

Generally, the surviving spouse is not given a general power of appointment over the trust property. All of the other statements are correct.

Question 8

The current yield of an 8% coupon bond, maturing in five years, and selling currently for $850 is:
A)
10.14%.
 B)
9.41%.
 C)
8.73%.
 D)
8.5%.

Answer 8

B

Question 9

The conversion provision of a life insurance contract allows the insured to:
A)
exchange a whole life insurance policy for a term policy.
B)
purchase additional insurance without evidence of insurability.
C)
renew a term life policy without evidence of insurability.
D)
exchange a term insurance policy for a permanent insurance policy without evidence of insurability.

Answer 9

D

Question 10

David is 20 years old and works part time while attending school full time. How much gross income can David earn so that his parents can still currently claim a dependency exemption for him?
A)
None of these.
B)
David can earn any amount.
C)
David’s earned income portion of his gross income cannot exceed $2,100.
D)
David’s gross income must be less than $4,000.

Answer 10

B

Question 11

Charlie is a 30-year-old CPA with his own tax practice. For most of the year, he works by himself, preparing and reviewing income tax returns. For the last 5 years, he has hired 3 part-time employees to assist him during the busy season. Each of these employees works approximately 200 hours, earning an average salary of $4,000. Charlie would like to establish a retirement plan that would allow him to save for his retirement, without significant administrative costs. Which of the following plans would be best suited for Charlie?

A)
Simplified employee pension (SEP) plan.
 B)
Cash balance pension plan.
 C)
Section 401(k) plan.
 D)
SIMPLE IRA.

Answer 11

D

Question 12

Stock price changes tend to:
A)
be insensitive to changes in the economy.
B)
lag behind actual changes in the economy.
C)
move in tandem with changes in the economy.
D)
lead actual changes in the economy.

Answer 12

D

Question 13

Sharon gives Patrick the absolute right to use her vacation house for life and upon Patrick's death, all rights to the house are assumed by Sharon again. What types of property interests do Sharon and Patrick have, respectively?
A)
Reversion and life estate.
 B)
Interest for a term of years and life estate.
 C)
Fee simple estate and reversion.
 D)
Life estate and reversion.

Answer 13

A

Question 14

Cortez Partnership established a cross-purchase buy-sell agreement funded by the two partners with cash value life insurance policies. The partnership is now dissolved, and the two partners have transferred ownership of the life insurance policies so that they each own life insurance policies on themselves. What are the tax consequences upon payment of the death benefits?
A)
The excess amount above cash value at the time of transfer and any additional premiums paid will be taxable as ordinary income.
B)
Under the transfer-for-value rule, the income tax exclusion is lost.
C)
The death benefits will be tax exempt.
D)
None of these.

Answer 14

C

Question 15

Which of the following plans is a qualified defined contribution profit-sharing plan that gives participants the option of reducing their currently taxable compensation by contributing on a tax-deferred basis to an individual account for retirement purposes?
A)
SEP plan.
 B)
Section 401(k) plan.
 C)
Section 403(b) plan.
 D)
Money purchase pension plan.

Answer 15

B

Question 16

Which of the following statements regarding availability of loans offered by retirement plans is(are) CORRECT?

1. If plan loans are made available, they must be available to all participants on a reasonably equivalent basis and must not be available to highly compensated employees in an amount greater than the amount made available to other employees.
2. If plan loans are made available, the loans must be made in accordance with specific plan provisions and bear a reasonable (market) rate of interest.

Answer 16

both statements are correct

Question 17

Which of the following statements concerning the need for long-term care insurance is (are) CORRECT?

1. A skilled nursing benefit for Alzheimer’s disease or mental dementia is not permitted under Medicare Part A because a patient’s condition would not be expected to improve in either case.
2. Medicare is inadequate because it does not provide coverage for custodial care.

Answer 17

both statements are correct

Question 18

When is a distribution from a TSA prior to the participant attaining the age of 59½ not subject to the penalty tax?

1. Employee death.
2. Employee disability.
3. Participant elects distributions as a series of substantially equal payments over the participant’s life expectancy.
4. The distribution is made pursuant a divorce decree.

Answer 18

1, 2, 3, and 4

Question 19

Which of the following is an example of tangible personal property?
A)
Land.
 B)
Furniture.
 C)
A residence.
 D)
Stocks and bonds.

Answer 19

B

Question 20

Which of the following statements describing how qualified plans are similar to SEP plans and SIMPLEs is(are) CORRECT?

1. Qualified plans, SEP plans, and SIMPLEs all provide for deferred compensation.
2. Plan sponsors of qualified plans, SEP plans, and SIMPLEs make contributions to either a trust, an insurance contract, or an individual retirement account depending on the type of plan.

Answer 20

both statements are correct

Question 21

Which of the following statements regarding a bypass trust is CORRECT?

A)
The surviving spouse cannot receive any income from the trust during her lifetime.
B)
The purpose of the bypass trust is to take advantage of the estate tax applicable credit amount.
C)
The assets in the trust qualify for the marital deduction.
D)
When the surviving spouse dies, the assets remaining in the bypass trust are included in the surviving spouse’s gross estate.

Answer 21

B

A bypass trust is used to take advantage of the estate tax applicable credit amount. The assets in the trust do not qualify for the marital deduction and are not included in the surviving spouse’s gross estate. The surviving spouse often is entitled to receive the income from the trust for her lifetime.

Question 22

To be eligible for long-term care benefits under Medicaid, the individual must be:
A)
eligible for Medicare.
 B)
above a certain income level.
 C)
previously confined to a hospital.
 D)
indigent or impoverished.

Answer 22

D

Medicaid is a state/federal welfare program that provides benefits to those who are indigent or impoverished. Each state determines the level of income and assets that qualifies. An individual does not have to be eligible for Medicare to obtain Medicaid benefits, and there is no requirement for prior hospital confinement.

Question 23

Tony, age 65, is a nonowner employee of Widget, Inc. He wants to defer his retirement from Widget, Inc. until age 75 and continue to work. Tony contributes 6% of his pay to the Section 401(k) plan, and his employer matches 100%. Which of the following statements is CORRECT?
A)
Tony will be subject to a 10% early withdrawal penalty on distributions received from his Section 401(k) plan.
B)
Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he attains age 70½.
C)
Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he retires if he does retire after age 70½.
D)
Tony cannot contribute to his Section 401(k) plan after age 70½.

Answer 23

C

Question 24

Donald is 75 years old and has been receiving required minimum distributions from his IRA for 4 years. According to the minimum distribution rules, if Donald dies today and his son, Jarred, age 50, is his beneficiary, which of the following options does Jarred have?

1. Leave the money in his father’s IRA account to accumulate.
2. Take a lump-sum distribution of the entire account balance.
3. If the plan permits, elect to distribute the account balance over a 5-year period.
4. Roll the account balance over to an inherited IRA and receive distributions over his life expectancy, reduced by 1 each year.

Answer 24

2, 3, and 4

Question 25

What, if any, is the primary difference in tax treatment between a general partnership and a limited partnership?
A)
The limited partners are treated only as capital investors, whereas the active partners receive both ordinary and capital distributions.
B)
Limited partnerships are taxed as corporations, while general partnerships are taxed as partnerships.
C)
None of these.
D)
The limited partners only receive capital distributions, while the general partners receive only ordinary income distributions.

Answer 25

C

As long as the limited partnership is classified as a partnership (and not a C corporation) for tax purposes, the taxation is no different than it would be if the organization were a general partnership, that is, the partnership issues a K-1 to all of the partners for their distributive share of items of income and loss. Limited partners generally must treat net income or loss from the partnership as passive.