Section 7: Executives - quiz questions
In a particular calendar year, the aggregate value of ISO's exercisable by an employee for the first time may NOT exceed:
a) $100,000 b) $500,000 c) $1,000,000 d) $5,000,000 See page 377-378 of Private Wealth (Hallman).
Your client Walt sells 10,000 shares of a highly concentrated position in his company stock for $75/share. He has held this position for more than ten years and has not run afoul of any legal or tax restrictions. His basis is $75,000. He also receives 5,000 fully vested shares of company stock this year as part of his performance share agreement. Lastly, Walt also sells shares of Disney for a gain of $150,000. He held those shares for exactly one year. Assume Walt pays 25% for long-term capital gains and 40% on ordinary income. What is Walt's total tax liability from these transactions this year?
a) $300,000 b) $322,500 c) $356,250 d) $378,750 Part I - 10,000 shares at $75 each = $750,000 - $75,000 basis = LTCG of 675,000 at 25% = $168,750. Part II - 5,000 shares at $75 each = $375,000 x ordinary income rate of 40% = $150,000. Part III - $150,000 STCG taxed at 40% = $60,000. Total tax liability = $378,750 ($168,750 + $150,000 + $60,000).
Under rule 144, the number of shares that can be sold for any 3 month period is limited to the greater of: ___% of outstanding share class and the average weekly trading volume of the shares during the previous ___ calendar weeks.
a) 1% and 4 calendar weeks b) 2% and 2 calendar weeks c) 1% and 2 calendar weeks d) 2% and 4 calendar weeks See reading "Providing Needs-Based Solutions for Managing Concentrated Stock Positions" by Nuveen - pages 3-4
Rule 16(b), also called the "short-swing profit rule" prohibits senior officers, directors or beneficial owners of >10% from profiting from the purchase or sale of company shares within any period of less than ___ months?
a) 3 month b) 6 months c) 9 months d) 12 months See reading "Providing Needs-Based Solutions for Managing Concentrated Stock Positions" by Nuveen - page 4
Under rule 144, unregistered shares must be held a minimum of ___ before they can be publicly sold?
a) 3 months b) 6 months c) 9 months d) 12 months See reading "Providing Needs-Based Solutions for Managing Concentrated Stock Positions" by Nuveen - pages 3-4
Investors must hold shares in an exchange fund for at least how many years to avoid incurring tax liability, and what percentage of the fund's assets must be invested in relatively illiquid assets?
a) 5 years and 10% b) 5 years and 20% c) 7 years and 10% d) 7 years and 20% See reading from "Wealth Management: Concentrated Equity Positions" page 2.
Your client believes his company's stock is a superior investment and wishes to increase the long-term holding of his company's stock. Instead of delaying his exercise until expiration, he may choose to exercise and hold under which of the following circumstances?
a) AMT consequences from incentive stock options warrant gradual exercise to minimize the impact b) pre-tax dividends exceed the financing cost c) lower ordinary income rates on NQSOs justifies d) your client is confident of appreciation at higher income tax rates See "Stock Option Strategies" from Wealth Management-Appendix 1 (Kochis)
Which of the following option exercise strategies would be considered appropriate for an executive looking to maximize growth with a positive outlook for the stock price? I. Cashless exercise II. 83(b) election III. Stock swap IV. Disqualifying Disposition
a) I & II b) II & III c) I & IV d) II, III & IV Choosing to take the Section 83(b) election creates ordinary income tax now but starts the capital gains period allowing greater appreciation in the future to be taxed at lower capital gains rates. A stock swap (or pyramiding) allows the employee to use shares held to exercise the options he/she has been granted. This strategy can be used to maximize the client's position (exposure) to the company stock - this may be appropriate for those who believe the stock will outperform other investment choices.
Which of the following are attributes of performance shares? I. executive recognizes no income at time of grant II. once earned the employee has a taxable event at capital gains rates if over 12 months between grant and receipt III. performance goals are often hard to determine and quantify appropriately IV. company receives a tax deduction equal to the value received by the executive minus cost basis in the year payment is received
a) I. and II. b) I. and III. c) II. and III. d) II. and IV. See "select readings on performance share plans": Executive Compensation Answer Book
Which of the following statements about nonqualified stock options (NQSOs) are true? I. option's exercise price may be set at, below, or above fair market value at the date of grant II. at the time of grant NQSOs are not taxed to the employee provided they have a readily ascertainable fair market value III. when exercised the difference between market value and the exercise price is taxed to the employee as a capital gain IV. NQSOs are transferable during the employee's lifetime
a) I. and II. b) II. and III. c) III. and IV. d) IV. and I. See Field Guide to Estate Planning, Business Planning & Employee Benefits - Nonqualified Stock Options
Each of the following statements about a "cashless option exercise" are accurate except for:
a) Reg T rules permit broker-dealers to advance funds to an executive in order to pay for the exercise of an option b) the process involves the broker paying the issuer the exercise price on the date required by the plan and selling enough stock to be acquired on exercise of the option to pay for the exercise price and required withholding plus a safety margin of 10% c) the broker uses the proceeds of the sale to pay the exercise price and the withholding taxes to the issuer and then pays the balance to the executive d) the exercise date is considered the purchase date for the stock issuable upon exercise and the sale date for that stock See "Executive Compensation Answer Book: What is a cashless option exercise?
All of the following statements accurately describe a supplemental executive retirement plan (SERP) except:
a) a SERP is a nonqualified retirement plan b) payments under a SERP are taxed as ordinary income to the employee in the year they are received c) SERPs are funded by both the employer and employee d) retirement benefits provided under SERPS are generally determined using either a defined benefit or defined contribution approach See Field Guide to Estate Planning, Business Planning & Employee Benefits - Supplemental Executive Retirement Plans (SERPs)
Your client has been granted shares (classified as "restricted stock") of her company. She expects to be at the company for a long time, particularly since she is a co-founder. Her marginal tax rate is not yet in the highest bracket and she expects the share price to rise dramatically in the next 3-5 years. What strategy might you discuss with her based on the circumstances described?
a) cashless exercise b) pyramid - stock swap c) Section 83(b) election d) cashless collar See pages 380-381 of Private Wealth (Hallma
Which of the following is appropriate for a client looking to receive a current stream of income and defer taxes on the sale of an appreciated stock holding?
a) charitable lead trust (CLT) b) donor advised fund c) charitable remainder trust (CRT) d) qualified covered call See reading "Providing Needs-Based Solutions for Managing Concentrated Stock Positions" by Nuveen - page 8
Your client's objective is to exercise in order to sell and reap current profits. Which of the following strategies makes the most sense?
a) client is not confident of required future stock price to calculate break-even price to justify further delay in exercise; client should delay exercise and sell later b) client is not confident of required future stock price to calculate break-even price to justify further delay in exercise; client should exercise and sell now c) client is confident of required future stock price to calculate break-even price to justify further delay in exercise; client is not confident of required future stock price beyond break-even; client should exercise now and hold for 12 months d) client is confident of required future stock price to calculate break-even price and the required future stock price; client should delay exercise and sell later See "Stock Option Strategies" from Wealth Management-Appendix 1
What are the tax consequences of an Incentive Stock Option (ISO)?
a) depending on circumstances capital gains are recognized at either the grant date or exercise date b) the bargain element (difference between value at exercise and option price) is a added back for AMT purposes c) disregarding AMT, if certain rules are met employee is taxed at ordinary income tax rates when he/she sells the stock d) capital gains are recognized upon the sale of an ISO equal to the sales price - the value of the stock at the date of grant See page 377-378 of Private Wealth (Hallman
Your client owns shares of his own company's stock and also has an option to buy more shares. He chooses to surrender a set number of shares in order to exercise his options. Your client has engaged in which of the following?
a) disqualifying distribution b) cashless exercise c) fraudulent transaction d) pyramiding (stock swapping) See "Executive Compensation Answer Book - What is pyramiding?"
To be effective a 10b5-1 plan must include all of the following terms except for:
a) number of shares to be sold b) price(s) at which the shares will be sold c) date to sell securities d) holding period See reading "Providing Needs-Based Solutions for Managing Concentrated Stock Positions" by Nuveen - page 4
Mark has a large position in ABC stock which he originally purchased in 1982. The stock is currently trading at $50 per share and Mark's cost basis is only $3 share. He is growing concerned over having such a significant amount of his net worth in 1 volatile stock as he nears retirement. However, he does not want to realize the capital gain by simply selling. What would be the most tax-advantageous hedging solution for Mark to limit his downside risk?
a) prepaid variable forward contract b) equity swap w/ collar c) single contract cashless collar d) purchase a put option See reading from "Wealth Management: Concentrated Equity Positions" - pages 3-4
The following are true of the prepaid variable forward contract except?
a) taxes are deferred until the end of the contract b) continue to receive stock dividends at the qualified rate c) disadvantage of PVF contract is that the premium for liquidity can be very high d) advantage of a PVF contract is that the client can reinvest proceeds immediately in diversified assets See reading from "Wealth Management: Concentrated Equity Positions" page 2.
What are the consequences when there is a disqualifying disposition of shares acquired through an incentive stock option (ISO)?
a) the employer loses a tax deduction b) the employee loses preferential tax treatment upon the sale of those shares c) the employee's unexercised ISO shares are forfeited d) the employer receives a tax deduction equal to the capital gain recognized by the employee The employee loses the ability to claim capital gains treatment on applicable gains from the sale of the stock. The employer receives a tax deduction equal to the amount of ordinary income that is taxed to the employee in the year in which the employee realized the income from a disqualifying disposition. See select readings from the Executive Compensation Answer Book: The Taxation of ISO's and NQSOs
Which of the following statements about transferring employee stock options is incorrect?
a) the transferor of a nonqualified employee stock option remains liable for the tax liability at exercise of the option b) IRS's position is that the value of the option gifted can be calculated only on the date of the transfer c) discounted valuations can be justified by the risk of non-vesting, lack of marketability, and the risk of concentration itself d) incentive stock options cannot be transferred while retaining their incentive characteristics See 2015 Field Guide to Estate Planning, Business Planning & Employee Benefits, pages 420 and 491.
The following type of nonqualified deferred compensation plan is a funded or unfunded plan maintained by an employer solely for the purpose of providing benefits for employees in addition to the benefits that may be funded through a qualified plan, but not in excess of the Section 401(a)(1) limitation of $260,000 (for 2014).
a) top-hat plan (SERP) b) excess benefit plan c) stock-appreciation rights (SARs) d) phantom stock See selected readings under LO 7.06 from the Nonqualified Deferred Compensation Answer Book - page 4"
What is the tax effect of a Section 83(b) election?
a) value is taxed to employee as ordinary income and employer gets a deduction in that year b) employee is taxed at capital gains if 12 months have passed and employer gets a deduction equal to the tax in that year c) employer gets a corporate income tax deduction if the employee sells the asset for a gain d) employee defers tax until sale of the asset and qualifies for more advantageous tax rate See page 380-381 of Private Wealth (Hallman
Nonqualified deferred compensation programs generally are NOT subject to which of the following requirements?
a) vesting, disclosure, funding, coverage b) vesting, legal, funding, coverage c) vesting, disclosure, tax, coverage d) vesting, disclosure, funding, fraud See selected readings from Nonqualified Deferred Compensation Answer Book - page 1
Which of the following statements regarding the tax ramifications of a disqualifying disposition of shares acquired through incentive stock options (ISOs) is not correct? Assume that in all cases below, the holder of the applicable shares sells those shares to an unrelated person.
a. Richard has just sold shares acquired through an ISO for $36 a share 6 months after he exercised the option on those shares at $60 a share. The fair market value of those shares was $70 a share at the time of exercise. These shares were granted to him 3 years ago at $48 a share which was also the fair market value of those shares on that date. Richard reports a capital loss of $8 a share. b. John sells shares acquired through incentive stock options for $100 a share exactly 18 months after he exercised options on those shares when the price was $75 a share. The fair market value of those shares when exercised was $100. These options were granted to him 22 months ago when the price of the shares was $40. John must report a gain of $25 a share as ordinary income. c. Mark sells 1,000 shares of stock acquired through incentive stock options for $30 a share when he had exercised the options on those shares 15 months ago at $20 a share when the fair market was $25 a share on the date of exercise. Mark was granted those ISOs 20 months ago when the price was only $5 a share. Mark must report a recognized gain of $10 a share of ordinary income. d. Jim sells 10,000 shares acquired through an ISO for $200 a share 11 months after he exercised the option on those shares at $80 when the fair market price was $150 a share. His company granted him the ISO on those shares 18 months ago with an exercise price of $80 a share when the fair market value was only $60. Jim's company receives a tax deduction of 700,000. See select readings from the Executive Compensation Answer Book: The Taxation of ISO's and NQSOs. You may also reference "Early Disposition of ISO Stock" at fairmark.com.
