Quiz 8

Question 1

Postmortem planning techniques on an estate that is worth 20 million. It’s a family cattle ranch that operates as a corporation.

Answer 1

Section 303 stock redemption - 35% rule
Section 6166 - 35% rule at 15 million. Section 2032A requires that the real and personal property of the business represent 50% of his gross estate rule (9.5 million) and 25% of his gross estate in respect to the real property (4.75mill). Lawrence’s estate does meet the requirements for a Section 2032A election. The AVD is not appropriate bc there is no indication of a decline in value of the corporation.

Question 2

ISO and AMT

Answer 2

Bob had an out of pocket cost of 10.00 per share (the grant price). He also paid $2.80 per share in AMT. The AMT paid increases his basis. Thus, his basis becomes 12.80 per share or $12,800

Question 3

IRR

Answer 3

expresses the effective return on an investment considering all cash flows.

Question 4

Time weighted return

Answer 4

expresses manager performance

Question 5

real return

Answer 5

adjusts nominal return for inflation

Question 6

Nominal return

Answer 6

fails to accurately express a particular investor’s return

Question 7

Which plan allows an employee to make the largest tax deductible contribution (403b, 457, they are the same, depends on the salary, she should contribute to both)

Answer 7

Both plans offer the same deferral limits. However because the 457 plan is not provided by a governmental employer no catch up contribution is available. You can make a catchup contribution to the 403(b) plan. She can only contribute to one plan.

Question 8

Double bonus arrangement

Answer 8

with the 162 double bonus arrangement, the first bonus would go into the annuity/life insurance and the second would pay Jesse’s phantom tax. Due to its conduit taxation an S corp cannot offer a non-qualified deferred compensation plan. Since we know little about how long other employees have worked for Doc, it uncertain as to whether the SEP would eliminate most of the full and part-time employees. The deferred compensation arrangement through a secular trust would create undesirable phantom income for Jesse.

Question 9

Lump sum money amount as part of divorce decree, is it subject to federal gift tax?

Answer 9

No if the payment occurs within a 3 year period after the divorce. It is still regarded as a marital gift and thus it is not subject to federal gift tax.

Question 10

Vacant lot sold to church. FMV 1 million. Willing to sell the land for 750k and claim a 250k charitable income-t-deduction. If the basis in the land is 200K how much gain will Terry be required to report on the sale of the land?

Answer 10

750k proceeds/1 mill FMV x 200k basis = 150k
The 750k in sales proceeds less 150k adjusted basis equals 600k. However, under a bargain sale to charity the basis is adjusted because the difference between the FMV of the property (250k) represents a charitable gift rather than a sale.