Practice Quiz 7 Flashcards

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1
Q

The doctrine of constructive receipt is:
A)
also called the economic benefit rule.
B)
triggered if there is an irrevocable transfer of funds made on the executive’s behalf that provides a benefit to the executive.
C)
triggered if an executive has control to receive income within stated limits.
D)
triggered if an executive has the ability to control the time and actual receipt of his income.

A

D

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2
Q

Generally, employer-paid premiums for a $50,000 group term life policy
A)
may be tax deductible by the employer and are not taxable to the employee
B)
are considered a part of compensation to the employee and included as gross income on his W-2
C)
are tax deductible by the employee and the employer
D)
are tax deductible by the employer and represent a tax liability for the employee

A

A

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3
Q

Max bought 10 shares of PET Corporation stock ten years ago. He paid $10 per share for the stock. The stock currently has a fair market value of $50 per share. Which of the following statements about Max’s stock is CORRECT?
A)
If Max sells the stock now, he must pay taxes on the full $500 he receives from the sale.
B)
If Max does not sell the stock now, he must pay taxes on the difference between the amount he paid for the stock and the current market price which will increase his basis in the stock.
C)
If Max does not sell the stock this year, he will not have to pay taxes on the difference between the amount he paid for the stock and the current market price this year.
D)
If Max sells the stock now, he must pay taxes on only half the amount he receives from the sale.

A

C

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4
Q
The issuer-specific component of the variability in a stock's total return that is unrelated to overall market variability is known as:
A)
nondiversifiable risk.
 B)
unsystematic risk.
 C)
fundamental risk.
 D)
systematic risk.
A

B

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5
Q

Ned, age 65 made the following transfers this year. Which of the transfers would be subject to generation-skipping transfer tax (GSTT)?
A)
Gift of $15,000 to a 9-year-old niece.
B)
Gift of $40,000 to his son to buy a new car.
C)
Gift of $25,000 to a coworker’s son who is 25 years old.
D)
Payment of $150,000 directly to a qualified institution to pay for granddaughter’s tuition.

A

C

The gift to the co-worker’s son is subject to the GSTT because the co-worker’s son is an unrelated person who is younger than Ned by 37 1/2 years or more. A gift to a 9-year-old niece is not subject to GSTT because she is only one generation apart and a related person.

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6
Q

Which of the following can be used as a defense against a claim of negligence?

  1. Contributory negligence.
  2. Comparative negligence.
  3. Last clear chance rule.
  4. Assumption of risk.
A

All of these can be used

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7
Q
A policy designed to provide protection against a lawsuit or judgment in excess of the limits of basic liability insurance is:
A)
a self-insurance policy.
 B)
a casualty insurance policy.
 C)
a personal liability umbrella policy (PLUP).
 D)
an excess benefit policy.
A

C

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8
Q

Which of the following are characteristics of ‘negligence per se’?

  1. Negligence per se is a situation in which the act itself constitutes negligence.
  2. The injured party does not have to prove negligence.
  3. Under certain situations, liability may be imposed simply because an accident happened.
  4. The injured party will be awarded damages, even though there was no legal wrongdoing.
A

1 and 2

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9
Q

What is the maximum gift that Bob and Sue, a married couple, can give to one donee in 2017 without paying any gift tax, assuming they have not made any previous taxable gifts?

A)
$5,518,000.
 B)
$28,000.
 C)
$10,994,000.
 D)
$11,008,000.
A

D

For 2017, the answer is $11,008,000 [($5,490,000 applicable exclusion amount × 2 donors) + ($14,000 annual exclusion × 2)]

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10
Q

Crescent Company is a manufacturing company that offers a 10% discount to all non-officer employees. Company officers, who are all highly compensated employees, are allowed a 30% discount on company products. Crescent’s gross profit rate is 35%. Which of the following statements about the taxable implications of these discounts is CORRECT?
A)
An officer who takes a 30% discount must include the extra 20% (30% − 10%) in gross income.
B)
None of the discounts are includable in income, because the discount in all cases is less than the company’s gross profit percentage.
C)
All discounts taken by employees are includable in their gross income, because the plan is discriminatory.
D)
All discounts taken by officers (30%) are includable in their gross income, because the plan is discriminatory.

A

D

The plan is discriminatory in favor of highly compensated employees; therefore, all discounts actually taken by officers, not just the excess of what is available to nonofficers, are includable in the officer’s gross income.

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11
Q

Which of the following are advantages of dividend reinvestment programs (DRIPs)?

  1. Shareholders can purchase the stock with a substantial reduction in commissions.
  2. The plan is automatic and does not require additional action on the part of the shareholder.
A

both statements are advantages of DRIPs

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12
Q

Mario has accumulated significant wealth over his lifetime, and he is currently implementing gifting techniques. He would like to take advantage of the annual exclusion. Transfers to which of the following trusts/accounts permit Mario to utilize the gift tax annual exclusion?

  1. Uniform Gift to Minors Account (UGMA).
  2. Grantor-retained annuity trust (GRAT).
  3. Qualified tuition plan.
  4. Section 2503(c) trust.
A

1, 3, and 4

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13
Q

Several years ago, Stan purchased a $400,000 whole life insurance policy on his life. He has paid cumulative premiums over the years of $20,000, and has accumulated a cash value of $25,000. This year, he was diagnosed with a rare liver disease, and as a result his life expectancy is only 6 months. Because of his large medical costs, he is considering selling his policy to a viatical settlement company. They have offered him $250,000 for the policy. He would also like to explore other ways to generate cash from the policy. Which of the following statements regarding Stan’s situation are CORRECT?

  1. If Stan sells his policy to the viatical settlement company, he will be taxed on any gain from the sale if he dies more than 2 years later.
  2. If the viatical company collects the death benefit as a result of Stan’s death, the proceeds will be tax free to the company.
  3. If Stan sold the policy to his cousin for $250,000, his cousin would be subject to ordinary income tax on a portion of the life insurance benefit when Stan dies.
  4. If Stan takes a loan from the policy, some or all of the loan will be subject to ordinary income tax if the policy is classified as a modified endowment contract.
A

3 and 4

Because Stan is terminally ill (i.e., expected to die within 2 years), he will not be taxed on the proceeds received from the viatical company even if he lives longer than 2 years. When the viatical company receives the death benefit, part of the death benefit will be taxed at ordinary income tax rates to the viatical company. The sale of the policy to Stan’s cousin would be considered a transfer for value. His cousin would be taxed on the death benefit (less amounts paid) because the transfer for value rules cause the death benefit to become taxable. With a MEC, loans or distributions from the policy are taxed on a LIFO basis, meaning that any earnings in the policy are taxed first.

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14
Q
John is an employee of ABC Company, where he earns a salary of $100,000. The company sponsors a defined benefit plan, with a unit-benefit formula that will pay John 2% of his final average compensation for each year of service with the company. The company also provides John with disability income insurance that will replace 60% of his income upon disability. ABC Company pays the premiums on the policy. Assuming John is in the 25% income tax bracket, and ignoring Social Security disability benefits, how much will John receive each month on an after-tax basis from the policy, assuming he meets the definition of disability?
A)
$1,200.
 B)
$5,000.
 C)
$1,400.
 D)
$3,750.
A

D

($100k x 60%) / 12 = $5,000

$5,000 x (1 - 25%) = $3,750

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15
Q

Which of the following statements regarding the transfer of a business through a family limited partnership (FLP) is CORRECT?
A)
No discount is permitted for the gifts because the children’s interest as a group will be more than 50% (a controlling interest).
B)
The family limited partnership should be funded with assets that are not expected to appreciate.
C)
The children receive limited partnership interests.
D)
The owner of the closely held business transfers general partnership interests to the children or grandchildren.

A

C

The parents/grandparents retain general partnership interests while transferring limited partnership interests to children/grandchildren. A discount for minority interest or marketability may be used in valuation purposes. FLP’s are particularly useful with assets expected to appreciate because the post-gift appreciation will be removed from the general partner’s estate, and any appreciation on interests not gifted will generally receive substantial valuation discounts.

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16
Q

Which of the following statements regarding the capital asset pricing model (CAPM) are CORRECT?

  1. Standard deviation is used as the measure of risk on the security market line.
  2. The capital asset pricing model formula defines the security market line.
  3. Superior performance exists if a fund’s position is above the capital market line.
  4. Both portfolio risk and return decrease when investors substitute risky securities for risk-free assets.
A

2 and 3

Beta is used as the measure of risk on the security market line. If risky securities are added to the portfolio, both risk and return will increase. The capital market line slopes upward indicating that as more risk is undertaken, more return should be achieved.

17
Q

Which of the following statements regarding the liquidity of an estate is(are) CORRECT?

  1. The types of assets that constitute an estate are not an important factor in assessing the estate’s liquidity.
  2. Lack of liquidity may force an estate to sell assets under disadvantageous conditions.
  3. Liquidity is important because cash may be needed to satisfy many obligations.
A

2 and 3

18
Q

Which of the following statements regarding private annuities is(are) CORRECT?

  1. The transfer of property does not trigger immediate recognition of all gain to the seller-annuitant.
  2. If the present value of the annuity is equal to the fair market value of the property transferred, there is no gift.
  3. Each annuity payment will generally consist of a partial return of basis, capital gain, and ordinary income.
A

all statements are correct

19
Q

Mike and Kim have been married for 20 years. Last year they were able to pay off the remaining balance of the 15-year mortgage on their home, which they own as joint tenants with right of survivorship (JTWROS). Mike does not work and Kim provides financial support for both of them. All mortgage payments have been made possible because of Kim’s income. If Kim died, what percentage of the home’s value would be included in her gross estate?

A)
0%.
 B)
25%.
 C)
50%.
 D)
100%.
A

C

Regardless of which spouse furnished the consideration, one-half of the value of JTWROS property is included in the gross estate of the first spouse to die.

20
Q

Which of the following statements concerning insurable interest is (are) CORRECT?

  1. In life insurance, insurable interest must exist at the time of death.
  2. In life insurance, insurable interest must exist at the inception of the contract.
  3. In property insurance, insurable interest must exist at the time of loss but not when the policy was purchased.
  4. In property insurance, insurable interest must exist at the time the contract was purchased and at the time of loss.
A

2 and 4

21
Q

Which of the following statements regarding powers of appointment is(are) CORRECT?

  1. A general power of appointment is not included in the holder’s gross estate if the holder does not exercise the power during the holder’s lifetime.
  2. A special power of appointment is usually not included in the holder’s gross estate.
  3. A power of appointment cannot lapse.
A

2 only

Statements 1 and 3 are incorrect. The property does not avoid inclusion in the gross estate just because the holder of the general power fails to exercise the power during the holder’s lifetime. A power of appointment can lapse if it is not exercised.

22
Q

When property is transferred to a revocable trust:
A)
the trust property will pass through probate when the grantor dies.
B)
there is a completed gift for gift tax purposes.
C)
the grantor will be taxed on the income generated by the trust assets.
D)
the grantor relinquishes all control over the trust property.

A

C

23
Q

All of the following statements concerning money markets are correct EXCEPT:
A)
Money markets securities include: short-term, highly liquid, relatively low-risk debt instruments sold by governments, financial institutions, and corporations to investors with temporary funds to invest.
B)
Treasury bills are an example of a money market security and are used as a proxy for the risk-free rate of return.
C)
Money market mutual funds are heavily used by prudent investors as part of their emergency fund because the funds are extremely liquid.
D)
Money market mutual funds are always tax exempt.

A

D

24
Q
Income from a voluntary employee benefit association (VEBA) is:
A)
considered unrelated business income.
 B)
always exempt from regular income tax.
 C)
exempt from regular income tax if certain requirements are met.
 D)
subject to capital gains taxes.
A

C

A VEBA is a type of organization (trust or corporation) established by an employer or through a collective bargaining agreement to hold funds used to pay benefits under an employee benefit plan. Income is exempt from regular income tax if the VEBA meets the requirements of Section 501(c)(9). Unrelated business income is income from a trade or business that is not substantially related to a nonprofit organization’s tax-exempt purpose and that is regularly carried on by the organization.

25
Q

Margaret gave her nephew an apartment in Chicago. She continued to live in the apartment until her death 4 years later. Which of the following statements are CORRECT?

  1. The value of the property will not be included in Margaret’s gross estate.
  2. This is a transfer with a retained life estate.
  3. It is important for estate tax purposes to know the value of the apartment on the day Margaret died.
  4. Any gift tax paid will be included in Margaret’s gross estate.
A

2 and 3