S65 Client Investment Recommendations/Strats (Units 15-18, 21-23)

If a client has realized a capital gain from the sale of a municipal bond, to reduce tax liability, the capital gain can be offset against a capital loss in which of these? I. GOs II. Equity securities III. Corporate bonds IV. REITs A) I, II, III, and IV B) II and III C) I only D) I and II

A) I, II, III, and IV A realized capital gain on a security may be offset by a capital loss realized from the sale of any type of security, including municipal bonds, equities, corporate bonds, or REITs.

A Schedule K-1 would not be used for tax reporting to the owners by which of the following business entities? A) Sole proprietorship B) Limited partnership C) S corporation D) LLC

A) Sole proprietorship Sole proprietorships generally complete Schedule C of the individual Form 1040. Legal entities that pass-through income or loss use the Schedule K-1 to indicate the amount of that income or the loss attributable to the individual shareholder/member/partner.

A business organized as which of the following pays federal income tax on its income? A) Sole proprietorship B) Partnership C) S Corporation D) LLC

A) Sole proprietorship The income generated by a sole proprietorship is reported on Schedule C of the Form 1040 of the individual owner. The IRS considers that business as a taxable entity. In the case of the other three choices, their income flows-through to the owners (members, shareholders, or partners, respectively) of the business itself, pays no tax.

When opening an account for a trust, which of the following sets of terms are synonymous? A) Trustee/settlor B) Settlor/grantor C) Beneficiary/trustee D) Grantor/trustee

B) Settlor/grantor The settlor, sometimes referred to as the grantor, is the person who establishes the trust. The trustee administers the trust and could be the grantor but does not have to be.

Which of the following is not included in taxable income on an individual's federal income tax return? A) Income from a sole proprietorship B) Interest received on Treasury bonds C) Receipt of stock dividends D) Wages and tips

C) Receipt of stock dividends Stock dividends (dividends paid as additional shares of stock rather than in cash) adjust the investor's cost basis and don't come into play until the stock is sold. Wages and tips are earned income. Income reported on Schedule C on the sole proprietor's Form 1040 is earned income. Interest paid to the taxpayer on U.S. Treasury bonds is taxed as ordinary income. The interest from these bonds is tax exempt on the state level, but this question is asking about federal tax.

An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed? A) As a $2,100 capital gain B) As $2,500 ordinary income C) The shares are not subject to taxation D) As a $2,500 capital gain

C) The shares are not subject to taxation Shares received per a stock dividend are not currently taxable. Instead, shareholders who receive stock dividends must adjust their cost basis in the shares downward. The total number of new shares, multiplied by their new adjusted basis, must equal the shareholder's total interest before the stock dividend was received.

When are estate taxes due? A) Nine months after valuation B) Six months after death C) Six months after valuation D) Nine months after death

D) Nine months after death Estate taxes are due nine months after death. The taxes are based on either the value at death or the alternative valuation six months after death.

The president of a business entity opens an account in the name of the business. When determining the suitability of recommendations to the account, knowing the president's personal financial condition is necessary for each of the following forms of business structure except A) an LLC. B) an S corporation. C) a sole proprietorship. D) a C corporation.

D) a C corporation. Only in the case of the C corporation are the income and losses of the investment account taxed at the corporate level rather than passed through to the owners.

An investment adviser could enter into an advisory contract with any of the following except A) the custodian for a minor. B) an LLC. C) a political subdivision. D) a person declared mentally incompetent.

D) a person declared mentally incompetent. Contracts can be entered into with any person as the term is defined in the law. Excluded from that definition are minors, deceased persons, and those declared mentally incompetent.

A form of business structure that exposes all personal assets of the owner to creditors is A) the LLC B) the C corporation C) the limited partnerships D) the sole proprietorship

D) the sole proprietorship One of the reasons why few large businesses are organized as sole proprietorships is the fact that all personal assets, not just those of the business, are placed at risk if the business fails. In each of the other choices, the maximum potential loss is the amount of the investment.

Which of the following is most commonly used when the author wants to express end of life wishes? A) A living will B) A living trust C) A testamentary trust D) A revocable trust

A) A living will Sometimes referred to as a medical directive or advanced care directive, a living will is used to express the author's end-of-life wishes such as organ donation, when to withdraw life-prolonging treatment, and so forth.

Increasingly, many institutional investors, especially those in the philanthropic arena, are using ESG factors when considering where to invest their funds. Those factors are most accurately described as A) environmental, social, and governance. B) earnings, systematic, and governmental. C) exchange, sales, and general. D) exchange, sensitivity, and growth.

A) environmental, social, and governance. The ESG business factors that should be considered when analyzing a firm are a company's environmental, social, and governance risk exposures.

In which of the following business structures does the owner assume full liability? I. S corporation II. LLC III. Sole proprietorship IV. General partnership A) II and III B) III and IV C) I and IV D) I and II

B) III and IV Sole proprietors are the business and are fully liable for all debts incurred. Unlike limited partners, general partners carry full liability for any debts incurred by the partnership.

Which of the following is an example of a regressive tax? A) Estate tax B) Sales tax C) Gift tax D) Income tax

B) Sales tax Regressive taxes are those where the rate remains the same, regardless of the cost of the item subject to the tax. For example, if your state has a 6% sales tax, it makes no difference if you are buying an item for $1 or $10,000—the tax rate is the same 6%. The other choices given are progressive taxes, where the tax rate increases as the dollar amount being taxed increases.

The benefits of structuring a business as a general partnership include A) the ability to raise large sums of money. B) avoidance of taxation at the entity level so the partners are not taxed twice. C) longevity. D) the general partners being liable only to the extent of their investments.

B) avoidance of taxation at the entity level so the partners are not taxed twice. General partnerships file a Form 1065 and pay no tax. Instead, each partner's share of the income is reported on Schedule K-1, making for a single rather than a double layer of tax. On the downside is that general partners have unlimited liability for the debts of the business. Unlike corporations, where there is no scheduled termination date, in general, partnerships have a dissolution date or a specified event described that will lead to termination. It is the C corporation structure that lends itself to raising large sums of money.

A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels? I. Federal II. State III. Local A) I only B) II only C) I, II, and III D) II and III

C) I, II, and III Interest on foreign bonds is taxed in the United States by federal, state, and local governments.

For tax purposes, the sale of an investment at a profit will result in A) ordinary income. B) passive income. C) a capital gain. D) alternative minimum tax liability.

C) a capital gain. Realizing a profit when selling an investment generates a capital gain, while dividend and interest income are taxed as ordinary income.

Using industry jargon, the tax on the last dollar of income is at A) the effective rate. B) the final rate. C) the marginal rate. D) the average rate.

C) the marginal rate. The IRS defines marginal tax rate as "the highest rate that you will pay on your income." Basically, as you make more money, you pay tax at a higher rate incrementally. The effective tax rate is the average that you pay on all of your income.

Which of the following accounts can only be opened by spouses? A) Tenants in common B) TOD accounts C) Tenants with right of survivorship D) Tenants in the entirety

D) Tenants in the entirety The unique characteristic of a tenants in entirety account is that it can only be opened by spouses. Each of the others can be opened jointly by any legal persons.

Among the differences between C corporations and S corporations is I. the liability assumed by the shareholders II. the number of allowable shareholders III. the tax treatment of the corporation's earnings IV. residency requirements of shareholders A) II and III B) II, III, and IV C) I, II, III, and IV D) I and IV

B) II, III, and IV A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.

If your clients, spouses both age 50, are interested in long-term growth and are willing to accept a moderate amount of risk, you should recommend A) a money market fund B) a large-cap stock fund C) a municipal bond fund D) an equity/income fund

B) a large-cap stock fund A mutual fund investing in large-cap stocks (see Glossary of Terms) has relatively moderate risk with likely growth potential.

Owners of private activity municipal bonds might find themselves A) receiving less interest than with a similar GO bond. B) subject to the alternative minimum tax. C) in violation of MSRB rules if proper disclosures are not made. D) taking an extraordinarily high risk.

B) subject to the alternative minimum tax. The interest on private activity municipal bonds (used for things like airports, student housing, etc.) is exempt from federal taxation but is considered a preference item for the AMT.

One of your clients invested $10,000 into a mutual fund. The client elected to reinvest all dividends. As a consequence of this, A) the reinvestments will purchase shares at a discount from the NAV. B) the investor's cost basis is increased by the amount of the reinvested dividends. C) the dividends will be taxed as capital gains once the shares are liquidated. D) taxes are deferred until those shares are redeemed.

B) the investor's cost basis is increased by the amount of the reinvested dividends. Because the reported dividends are taxed each year, when the shares are ultimately liquidated, they have already been taxed. So, the investor's cost basis is increased by the amount of the reinvestment. Reinvested dividends are purchased at the NAV; mutual fund shares are never purchased below the NAV.

Agatha has an account with her Aunt Sally, which is registered as TIC. If Sally predeceases Agatha, the assets in the account go to A) the person designated under the laws of escheat in her state. B) Agatha. C) Sally's estate. D) Sally's spouse.

C) Sally's estate. When an account is opened as tenants in common (TIC), upon the death of one of the cotenants, that individual's share now becomes part of the deceased's estate. It might be that Sally's spouse or Agatha are beneficiaries named in Sally's will, but we don't know that.

Property included in a deceased's gross estate is generally valued for estate tax purposes at A) its original cost less depreciation. B) the amount the deceased paid for it. C) its fair market value (FMV) on the date of the deceased's death. D) its fair market value (FMV) on any date the estate chooses to use.

C) its fair market value (FMV) on the date of the deceased's death. Property included in the gross estate is generally valued at its fair market value (FMV) on the date the deceased died. An estate can also elect to value property on the alternate valuation date, which is usually six months after the date of death.

A trust document's investment policy emphasizes that the fiduciary must follow SRI. When you are asked by the trustee to explain what that means, you would reply, A) sustainable reasonable investing. B) systemic responsible investing. C) socially responsible investing. D) safe responsible investing.

C) socially responsible investing. Socially responsible investing (SRI) is an impact investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. You might also see SRI referred to as sustainable responsible (not reasonable) investing.

If an employed client has $12,000 of capital gains and $15,000 of capital losses in the most recent taxable year, how much unused loss, if any, is carried forward by the client to the following tax year? A) $0 B) $12,000 C) $15,000 D) $3,000

A) $0 In this question, the client had $12,000 of capital gains and $15,000 of capital losses. Step 1: Offset the capital gains with the capital losses ($15,000 - $12,000). This leaves $3,000 remaining in capital losses. Step 2: Note that the client can apply up to a maximum of $3,000 of any remaining losses against ordinary income. Once all $3,000 in remaining losses is used to reduce ordinary income, this would leave $0 to carry forward to the next year. Therefore, the reason you would not carry $3,000 to the next year is that it would be used to reduce ordinary income for the current year. It can be safely assumed than an employed client of a broker-dealer makes at least $3,000 per year.

A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a 501(c)(3) charity, how much can he claim as a tax deduction for this donation? A) $18,000 B) $0 C) $12,000 D) $6,000

A) $18,000 Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than one year. The fair market value of the deduction allowed for 200 shares is 200 multiplied by the current market price of the stock, or $18,000.

Under current tax law (2022), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $64,000 B) Unlimited C) $32,000 D) $16,000

A) $64,000 The current gift tax exclusion (2022) is $16,000 per donor to each recipient. A married couple can give $32,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $32,000 to their son and $32,000 to their daughter-in-law without paying any gift tax.

Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to A) Mr. Hawkins as the donor B) Mrs. Hawkins as the contingent beneficiary C) Madeleine as the primary beneficiary D) the trust because it is a separate legal entity

A) Mr. Hawkins as the donor Because Mrs. Hawkins has an economic interest, this is a grantor trust. Thus, all income will be taxed to the donor, Mr. Hawkins.

Which of the following business accounts does not require considering the suitability of the owners? A) S corporation B) C corporation C) Sole proprietorship D) General partnership

B) C corporation Because the C corporation is an entity separate from its shareholders, suitability for a C corporation account is based solely on the company itself. All of the others provide flow-through of income and loss to the individual owners so it is important to view the collective suitability of the individual owners (or single owner in the case of the sole proprietorship).

Which of the following offers the opportunity to realize a capital gain rather than ordinary income? A) Deferred annuities B) Stock dividends C) Cash dividends D) Section 529 plans

B) Stock dividends Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner's cost basis and, when sold at a price above that cost basis, are treated as a capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty.

If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate? A) A general partnership B) A sole proprietorship C) A limited liability company (LLC) D) An S form of corporation

C) A limited liability company (LLC) If a businessowner's goal is ease in raising capital, the limited liability company (LLC) is the best choice because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien.

When comparing the tax treatment of C corporations, S corporations, and LLCs, it would be correct to state that A) all three have the same tax filing date. B) only the C and S corporations offer the benefit of flow-through. C) the C corporation is the only one that pays taxes. D) registered personnel opening a brokerage account for any of these would follow similar suitability procedures.

C) the C corporation is the only one that pays taxes. Only the C corporation is a separately taxed entity; the income (or loss) from an S corporation or LLC flows-through to the shareholders/members. The tax filing dates for the two flow-through entities is the same, generally March 15. The tax filing date for the C corporation is the 15th day of the fourth month after the end of the fiscal year (April 15 for a calendar year filer). The suitability for the S corporation and the LLC generally looks through to the individual owners, but that is not the case with the C corporation.

One of your clients buys 300 shares of RIF common stock in March at $25 per share. Three months later, the client purchases 200 shares of RIF at $30 per share. One month later, RIF pays a dividend of $1 per share. Then, five months later, another purchase of RIF is made—this time 400 shares at $35 per share. If the client were to sell all RIF at $30 per share, what is the client's capital gain or loss? A) $500 gain B) No gain or loss C) $400 gain D) $500 loss

D) $500 loss The investor's total cost is $27,500 for the 900 shares purchased. The proceeds of the sale are $27,000 (900 × $30). That results in a capital loss of $500. The cash dividend has nothing to do with capital gain or loss

A married couple has lived in the same home for 40 years and now, with the children all gone, they've decided to sell and move to a retirement village. They purchased the home for $80,000 and have accepted a contract for $800,000. The tax consequence of this sale is A) a $720,000 capital gain. B) a $0 capital gain. C) a $470,000 capital gain. D) a $220,000 capital gain.

D) a $220,000 capital gain. As long as a homeowner has lived in the primary residence at least two of the previous five years, the first $250,000 of profit on a home sale is excluded from tax. In the event it is a married couple, as in this question, the exclusion is doubled to $500,000. The profit on the sale was $720,000 ($800,000 minus the cost of $80,000) and the exclusion of $500,000 reduces the reportable gain to $220,000.

Richard, Tim, Sam, and Fred have a regular golf foursome every weekend. During one of their outings, they decide it is time they did something constructive with their money by opening an account with a brokerage firm. If the account is opened tenants in common, suitability information would be required on A) whichever person has been designated by the group as its spokesman B) each of the individuals, and if married, their spouses C) only that individual with the authorization to trade the account D) each of the four individuals

D) each of the four individuals On any joint account, it is required to obtain suitability information on all of the account owners.

Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor? I. An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer II. An account opened by a sole proprietor in the name of the company III. An account opened in the name of ABC Corporation, an S corporation by one of its shareholders IV. An account opened in the name of the GHI Fund, a regulated investment company, by the fund's portfolio manager A) II and III B) III and IV C) I and IV D) I and II

A) II and III Sole proprietorships and S corporations have their income and losses pass through to the owners. Therefore, an account opened in the name of the business will create tax consequences for the owners. Regular, or C corporations, pay taxes on their earnings and, even though a regulated investment company passes through at least 90% of its earnings to shareholders, the tax situation of each individual shareholder of the fund is of no consideration when making recommendations to the fund's portfolio manager.

When a trustee is managing the trust assets, which of the following is the most important consideration? A) The purposes, terms, distribution requirements, and other circumstances of the trust B) Minimizing expenses C) Reasonable income D) Preservation of capital

A) The purposes, terms, distribution requirements, and other circumstances of the trust Although there certainly is a case for preservation of capital, reasonable income, and minimizing expenses, the most important consideration is to follow the design and objectives of the trust.

An investment adviser registered in 4 states would be permitted to enter into an advisory contract with all of the following prospective clients except A) a minor. B) a bank. C) a trust. D) an insurance company.

A) a minor. Because minors are not considered legal persons, advisory (or brokerage) accounts cannot be opened for them. Unit 24 discusses the UTMA accounts for minors.

In making suitable investment recommendations, the least significant element would generally be the client's A) educational level B) current income C) death and disability needs D) retirement needs

A) educational level A client's educational level is not as important as retirement, death and disability, and current income. However, the adviser should take note of the client's educational level to ensure that the client fully understands the investments recommended. Also, a person with a professional educational background may have more employment opportunities and be able to take more risk as a result.

The alternative minimum tax (AMT) is assessed against A) high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income. B) high annual income earners and gives them special deductions to take that lower income earners do not get. C) low annual income earners and allows special deductions for them to be taken. D) all self-employed individuals.

A) high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income. The alternative minimum tax (AMT) is assessed against high annual income earners. When calculating adjusted gross income (AGI), some deductions and exemptions are disallowed, resulting in a higher taxable AGI. In the real world, it is not only those with high incomes that are caught by the AMT, but the exam is not likely to go that deep.

One of your customers has been told that an irrevocable trust is something to consider. Probably the most significant reasons for this type of trust is that A) it generally avoids estate tax. B) it allows the grantor to serve as trustee. C) the donor has the ability to change the beneficiary as desired. D) the assets in the trust pass directly to the beneficiary following probate.

A) it generally avoids estate tax. A properly constructed irrevocable trust removes the grantor's assets from the estate thereby eliminating estate tax on them. The grantor no longer has the power to change the beneficiary and cannot serve as trustee. The assets pass directly to the beneficiary without going through probate.

Keisha has three married children, each with children of their own. She wishes to leave equal shares of her estate to each of her children. What happens if one of those children dies before Keisha? A) The estate is divided equally among the two surviving children. B) The estate is divided equally among the two surviving children and the children of the deceased child. C) The share belonging to the deceased child is distributed per stirpes. D) The estate is divided on a per capita basis.

C) The share belonging to the deceased child is distributed per stirpes. Unless specified otherwise, assets in an estate are distributed per stirpes (sometimes called in stirpes). Stirpes is a Latin word meaning branches. In this context, it is used to determine how the next generation receives a share in an estate when the parent predeceases the grandparent. As an example, if Keisha had child A, child B, and child C and if child C died having two living children, the estate would be divided as follows: child A would get ⅓, child B would get ⅓, and the two children of child C would each receive ¹⁄₆ (each receiving half of child C's portion). If you selected, "The estate is divided equally among the two surviving children and the children of the deceased child," that would mean that everyone would receive ¼, and that is not the way it is done.

A married couple has lived in the same home for 40 years and now, with the children all gone, they've decided to sell and move to a retirement village. They purchased the home for $80,000 and have accepted a contract for $800,000. The tax consequence of this sale is A) a $720,000 capital gain. B) a $0 capital gain. C) a $220,000 capital gain. D) a $470,000 capital gain.

C) a $220,000 capital gain. As long as a homeowner has lived in the primary residence at least two of the previous five years, the first $250,000 of profit on a home sale is excluded from tax. In the event it is a married couple, as in this question, the exclusion is doubled to $500,000. The profit on the sale was $720,000 ($800,000 minus the cost of $80,000) and the exclusion of $500,000 reduces the reportable gain to $220,000.

Your client recently sold his business for $5 million. He is 55 and feels that he is too young to retire. He plans to start a new business venture and will be funding the $250,000 start-up costs with his own funds. With substantial personal assets, he could limit his personal exposure by using any of the following business structures except A) a C corporation. B) a limited liability company. C) a sole proprietorship. D) an S corporation.

C) a sole proprietorship. The limited liability company (LLC) and both corporations offer the benefit of limited liability to the owner. If the business is structured as a sole proprietorship, personal assets are put at risk.

When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as A) asset allocation. B) program-related investing. C) engineered investing. D) impact investing.

D) impact investing. Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact.

Each of the following could cause an investor to be subject to the alternative minimum tax except A) interest received on school district GO bonds. B) excess intangible drilling costs. C) accelerated depreciation taken on certain property. D) interest received on private activity municipal bonds.

A) interest received on school district GO bonds. General obligation (GO) bonds are not subject to the alternative minimum tax (AMT).

The term earned income would include A) the death benefit from a variable life insurance policy. B) the death benefit from a variable annuity policy. C) alimony received as part of a divorce decree executed on January 15, 2019. D) a bonus paid as a result of your division exceeding its goals.

D) a bonus paid as a result of your division exceeding its goals. The IRS defines earned income as wages, salaries, tips, and other taxable employee pay, such as bonuses. The death benefit from a variable annuity policy is taxed as ordinary income but is not earned. The death benefit from a variable life insurance policy is generally free of income tax, so it cannot be earned income. Under the TCJA of 2017, alimony received from a divorce decree dated January 1, 2019 or later is not earned income.

Many different investments offer the opportunity to reinvest income. If one were to compare the difference between interest-on-interest reinvestment plans and dividend and capital gain reinvestment plans, A) in the case of interest-on-interest plans, taxes are deferred until liquidation. B) in both cases, all income is deferred until liquidation. C) in the case of dividend and capital gains reinvestment plans, taxes are deferred until liquidation. D) in both plans, all income is taxable in the year received, whether reinvested or not.

D) in both plans, all income is taxable in the year received, whether reinvested or not Regardless of the type of plan, any income, whether reinvested or not, is always taxed in the current year. Think of an interest-on-interest plan as a passbook savings account where the interest is credited and compounded. Whether taken out or not, the earnings are reported on an annual basis. On the exam, the question may ask for a difference as we have here; as you can see, though, there is no difference.

The alternative minimum tax (AMT) becomes a consideration when a taxpayer has so-called tax preference items. Included in that definition is A) tips received while working at a restaurant. B) interest from U.S. Treasury bonds. C) overtime pay from a job. D) interest from private activity bonds.

D) interest from private activity bonds. When an individual has tax preference items, AMT becomes an issue. One of the securities that generates preference income is a private activity bond, which is a revenue bond that is issued to benefit certain facilities such as airports, sports facilities, and hospitals. Interest on Treasury securities is never a preference item, and earned income—such as wages, salary, and tips—is not considered a preference item.

A customer in the 25% tax bracket bought 200 shares of ABC at $93 per share plus commission of $50. Considering the customer's cost basis, when she sold 100 shares six months later at $96 per share, less commission of $50, her after-tax net was A) $168.75. B) $300.00. C) $150.00. D) $56.25.

A) $168.75. Because the purchase and sale were of different lots, you must compute the net proceeds on a per share basis. Dividing the cost of $93 + commission of $0.25 ($50 ÷ 200 shares) gives you a total per share cost of $93.25. Selling for $96.00 - $0.50 ($50 ÷ 100 shares) = $95.50 proceeds per share. $95.50 - $93.25 = $2.25. $2.25 multiplied by 100 shares sold = $225.00. In a 25% tax bracket, this is a taxable short-term gain and 25% of $225.00 = $56.25. Therefore, her after-tax net was $168.75 ($225.00 - 56.25).

If an investor swaps identical issues of stock to establish a loss that is disallowed, the transaction is known as A) a wash sale. B) a stock cross. C) a stock swap. D) a reverse stock split.

A) a wash sale. The wash sale rule disallows claiming a tax loss on the sale of stock if the investor purchases a substantially identical security within 30 days either before or after the date of such sale.

Gloria wishes to set up a trust where income must be annually distributed to her daughter. Gloria wants her daughter to pay any income taxes because her daughter is in a lower tax bracket. What should Gloria do? A) Use a complex trust with her daughter as irrevocable beneficiary B) Use a simple trust with her daughter as revocable beneficiary C) Use a complex trust with her daughter as revocable beneficiary D) Use a simple trust with her daughter as irrevocable beneficiary

D) Use a simple trust with her daughter as irrevocable beneficiary Simple trusts must annually distribute income to the beneficiaries. Complex trusts do not. If Gloria makes the beneficiary revocable, the trust is subject to grantor trust rules and the income will be taxed to Gloria.

An example of an interest-on-interest reinvestment program is A) reinvesting the dividends distributed on a bond fund. B) reinvesting the earnings on a bond UIT. C) reinvesting the interest received on a bond. D) interest left to compound on a bank-insured certificate of deposit.

D) interest left to compound on a bank-insured certificate of deposit. Interest-on-interest reinvestment is, as the term implies, the practice of compounding earnings by reinvesting them. This is traditionally the way a bank savings account or certificate of deposit builds in value. Reinvesting the dividends on a bond fund is dividend reinvestment even though most, if not all, of the fund's income is generated by interest. The same is true with the unit investment trust (UIT). There is no program for reinvesting bond interest similar to a dividend reinvestment plan (DRIP).

Many corporations make available dividend reinvestment plans (DRIPs) for their shareholders. Which of the following are among the benefits of using DRIPs? I. Allowing the investment to compound II. Discounts from the current market price III. Reduced taxation IV. The ability to accept the dividend in cash or in additional shares of stock A) I and II B) II and IV C) I and III D) I and IV

A) I and II DRIPs, like any other plan involving dividend reinvestment, offer the opportunity to have the investment compound. In most cases, shares are available at a slight discount from the current market and/or the commissions are reduced or eliminated. Many plans allow investors to add thousands of dollars to the reinvested dividend, taking advantage of the previous two benefits. However, there is no tax advantage. This is merely reinvesting a cash dividend, not receiving a stock dividend.

An investor would have to pay the alternative minimum tax when A) the investor's capital gains exceed 10% of total income. B) it exceeds the investor's regular income tax. C) the investor has received income from a limited partnership. D) there are tax-preference items reported on the tax return.

B) it exceeds the investor's regular income tax. A taxpayer must pay the alternative minimum tax (AMT) in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring the AMT, but the AMT is paid only if that amount is higher than the regular income tax.

One respect in which an LLC differs from an S corporation is that A) not only income, but losses, if generated, pass through to investors in an LLC B) there is no statutory limit on the number of investors in an LLC C) there is more favorable tax treatment afforded to members of an LLC D) an LLC can be formed with as little as a single investor

B) there is no statutory limit on the number of investors in an LLC There is no limit to the number of investors (members) in an LLC, while current regulations limit the number of investors (shareholders) in an S corporation to 100. The tax treatment is the same, and both can be formed with a single owner.

An investor inherits 1,000 shares of the ABC Global Growth Fund when NAV is $9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? A) Long-term capital gain of $5,500 B) Long-term capital gain of $5,000 C) Long-term capital gain of $4,750 D) Long-term capital gain of $4,250

C) Long-term capital gain of $4,750 Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). The IRS uses that number because it represents the price at which those shares could have been redeemed. The final sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares). Had this question said the investor bought the shares, then the cost basis would have been the price paid for the shares, the POP. That would have made the answer $4,250 ($14.25 - $10 times 1,000 shares).

One of your customers purchased a variable life insurance contract through your firm. After 14 years, he had deposited $15,000 in premiums, and his death benefit had grown to $80,000. Shortly after taking out a loan against cash value of $10,000, he was killed in an automobile accident. What will be the tax consequences of this situation to the death benefit? A) His beneficiary must pay taxes on the amount of the death benefit that is over and above the cost base of $15,000 plus the unpaid loan. B) His beneficiary need not pay taxes on the death benefit. C) The first $15,000 is tax free with the excess being treated as a long-term capital gain. D) His beneficiary must pay taxes on the amount of the death benefit that is over and above the cost base of $15,000.

B) His beneficiary need not pay taxes on the death benefit. A death benefit payable on a life insurance policy or contract is not subject to taxation. The insurance company will deduct the balance of the $10,000 loan before it releases the death benefit to the beneficiary, but that does not affect the tax consequences.

Jean owns a $1 million life insurance policy on her mother, Clara. Jean is named as sole beneficiary, and so far she has paid $150,000 in premiums. If Clara dies, which of the following will occur? I. The proceeds will be exempt from income tax. II. Some of the proceeds ($850,000) will be subject to income tax. III. The proceeds will be included in Clara's estate for estate tax purposes. IV. The proceeds will not be included in Clara's estate. A) I and III B) II and III C) I and IV D) II and IV

C) I and IV Life insurance proceeds are generally free from income taxes and will be free from estate taxes, if the insured possesses no incidence of ownership. In other words, a beneficiary other than the deceased's estate has been named, and the owner is someone other than the insured.

An investor purchased 500 shares of stock on January 10, 2020, at $50 per share and sold it on August 4 of the following year for $40 per share. As a result, the investor realized A) a short-term capital gain. B) a short-term capital loss. C) a long-term capital gain. D) a long-term capital loss.

D) a long-term capital loss. Buying stock at $50 per share and selling it for $40 per share creates a capital loss of $10 per share. In this case, because the holding period was more than a year and a half, the loss is long term. If the purchase was in January 2020 and the sale was in August of the following year, that must be August 2021.

One of your ultra-high net worth clients has extensive real estate holdings and is concerned about his children being forced to liquidate some of them in order to pay the estate taxes after his death. One tool that could be suggested to solve this problem would be A) using a TOD account. B) placing the properties into a living trust. C) registering the properties as JTWROS. D) purchasing a life insurance policy using an ILIT.

D) purchasing a life insurance policy using an ILIT. Estate taxes must be paid within nine months of death. If the client doesn't want to have to liquidate his real estate holdings, then another source for the tax payment must be found. A frequently-used tool is the irrevocable life insurance trust (ILIT) where a policy is purchased on the life of the client, but owned by the trust. When properly structured, this means that the death benefit is not included in the estate and passes tax free to the beneficiaries. Those funds can then be used to pay the estate taxes and the real estate assets pass to the beneficiaries. A living trust won't work because the only way the policy's proceeds aren't considered part of the estate is when the trust is irrevocable. TOD and JTWROS avoid probate, but do not avoid estate taxes.

If an employed client has $12,000 of capital gains and $15,000 of capital losses in the most recent taxable year, how much unused loss, if any, is carried forward by the client to the following tax year? A) $3,000 B) $12,000 C) $0 D) $15,000

C) $0 In this question, the client had $12,000 of capital gains and $15,000 of capital losses. Step 1: Offset the capital gains with the capital losses ($15,000 - $12,000). This leaves $3,000 remaining in capital losses. Step 2: Note that the client can apply up to a maximum of $3,000 of any remaining losses against ordinary income. Once all $3,000 in remaining losses is used to reduce ordinary income, this would leave $0 to carry forward to the next year. Therefore, the reason you would not carry $3,000 to the next year is that it would be used to reduce ordinary income for the current year. It can be safely assumed than an employed client of a broker-dealer makes at least $3,000 per year.

Which of the following statements regarding estates are correct? I. Estate taxes are due on April 15 of the first year following the death of the deceased. II. Estate taxes are due nine months after the date of death of the deceased. III. Assets are valued based on their market value as of the date of death or, alternatively, six months later. IV. Assets are valued based on their cost or, alternatively, six months after the date of death. A) I and IV B) II and IV C) II and III D) I and III

C) II and III Estate taxes are due, unless an extension has been obtained, no later than nine months after the date of death. For estate tax purposes, the executor (or administrator) may elect to use the values as of the date of death or those six months later (the alternative valuation date).

There are many different legal ways to structure a new business entity. One of these is the general partnership. Among the benefits of using this structure would be A) the 50% dividends received exclusion B) limited liability C) ease of formation D) substantial capital can be raised with little effort and low cost

C) ease of formation Compared with a corporation, it is generally easier to form (and dissolve) a partnership. General partners have full liability and there is no 50% dividends received exclusion for partnerships; that only applies to corporations. C corporations are the entity for raising a lot of capital.

Howard is the owner of 4 different insurance policies. Which of the following policies have death benefits proceeds that are not subject to income tax upon death of the insured? Policy 1; his wife is the insured. Policy 2; his business partner is the insured. Policy 3; his daughter is the insured. Policy 4; he is the insured. A) I, II, III, and IV B) II and III C) II and IV D) I, II, and III

A) I, II, III, and IV The question is asking for income tax treatment of insurance proceeds, not estate tax treatment. Life insurance proceeds are not income taxable to the beneficiary of the policy.

Your client purchased 1,000 shares of ABC common stock on February 28, 2021. When did that purchase qualify for long-term capital gain or loss treatment? A) March 1, 2022 B) March 1, 2021 C) February 29, 2022 D) February 28, 2022

A) March 1, 2022 Long-term treatment applies when a sale is made more than 12 months after the purchase. The best way to compute this is to add one day to the purchase and then use that same date, 12 months in the future. Adding one day to February 28, 2021 is March 1, 2021. Twelve months later is March 1, 2022.

Two sisters might wish to open an account as tenants in common (TIC) rather than JTWROS in order to A) allow the spouse of each sister to have access to the account. B) provide for an undivided interest in the assets of the account. C) ensure that their respective shares go to their heirs instead of the surviving sister. D) limit the right of each party to withdraw assets from the account.

C) ensure that their respective shares go to their heirs instead of the surviving sister. In a TIC account, when one of the cotenants dies, that individual's share of the account passes to her estate, not directly to the survivor (as is the case with JTWROS). For either kind of account, only the named cotenants have access to the account, not their spouses. In both types of accounts, there is an undivided interest in the account and any cotenant has full right to withdraw assets (but any certificates or checks must be in all names).

One of your customers would like to be able to reduce current taxable income. Contributions to which of the following would be an appropriate recommendation? A) A Section 529 plan for grandchildren B) A deferred annuity C) A Roth IRA D) A donor advised fund

D) A donor advised fund A donor-advised fund operates as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. As such, contributions to the fund will generate a current tax deduction for the customer. Section 529 plans offer tax-deferred growth but not a current tax deduction. Roth IRAs offer the potential of tax-free income, but current contributions are not tax-deductible. A deferred annuity means the earnings in the account are deferred until the money is withdrawn. Once again, there is no current tax benefit. Remember, every annuity on the exam is nonqualified unless something in the question indicates otherwise.

There are many sources of taxable income to an individual. Included might be money received from which of the following? I. Sole proprietorship II. Subchapter S corporation III. Investments IV. Life insurance death benefit A) I, II, III, and IV B) I and II C) II and III D) I, II, and III

D) I, II, and III An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will possibly use the obsolete term Subchapter S). Of course, taxable income can be generated by investments in the form of dividends, interest, and capital gains. The death benefit from a life insurance policy is not subject to income tax.

In making suitable investment recommendations, the least significant element would be the client's A) death and disability needs B) educational level C) current income D) retirement needs

B) educational level A client's educational level is not as important as retirement needs, death and disability needs, and current income. However, the agent should take note of the client's educational level to ensure that the client fully understands the investments recommended. Also, a person with a professional educational background may have more employment opportunities and be able to take more risk as a result.

The amount of federal income tax a U.S. citizen residing in the country will pay is dependent on all of these except A) filing status. B) state of residence. C) gender. D) age.

C) gender. Tax rates are not dependent on one's gender. Age has an impact because there is an extra exemption for those age 65 or older. State of residence is a factor because certain state taxes are deductible on your Form 1040. Filing status is very important because in most cases, married filing jointly results in the lowest taxes.

A client with a sizable estate would probably find it most efficient to pay estate taxes with A) proceeds from a life insurance policy. B) proceeds from the liquidation of a tax-deferred retirement plan. C) cash. D) proceeds from the liquidation of a diversified portfolio.

A) proceeds from a life insurance policy. In general, people with estates where there is a potentially large estate tax liability find that the most efficient way to pay those taxes is through a life insurance policy, because those proceeds are exempt from income tax. In many cases, the client has someone else be the owner of the policy. When that is done properly (such as with an irrevocable life insurance trust), it removes the policy from the estate, making the proceeds also free of estate tax.

A married couple wishes to open an account at your firm. Which choice of registration would you recommend if they insist that no trading be done without the consent of both of them? A) Tenants by the entirety B) Tenants with right of survivorship C) Joint tenancy D) Tenants in common

A) Tenants by the entirety Tenants by the entirety (TE) is unique in that it is the only common form of account registration requiring the consent of both parties prior to any activity taking place in the account. With the other forms, either party to the account can initiate trading activity.

The main purpose of dividend reinvestment in a mutual fund accumulation plan is to A) compound the growth of a mutual fund investment. B) protect against capital loss. C) avoid commissions or sales charges. D) avoid taxes.

A) compound the growth of a mutual fund investment. Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. Taxes are due on dividends whether or not they are reinvested. Capital gains or losses will occur whether or not dividends are reinvested. The purchase of additional shares with reinvested dividends may increase the capital gain or loss in proportion to the dividends reinvested. Avoiding commissions or sales charges is not the main rationale for reinvesting dividends, even though sales charges are not applied to reinvested dividends.

A deceased individual with two surviving children and a spouse had established a trust for his family. The trust document appointed both children as cotrustees. The surviving spouse is to receive current income, and his two children will receive equal shares of the remaining principal upon the spouse's death. As the adviser to the account, you A) focus on increasing principal for the children. B) follow the instructions of the trustees. C) attempt to generate reasonable income while keeping the principal intact for the children. D) focus on generating income for the spouse.

B) follow the instructions of the trustees. The responsibility of following the trust's instructions is that of the trustees. Should they attempt to deviate from that, the adviser should inform them that they face potential liability under trust law. However, in all cases, the adviser must follow the direction of the trustees. As a practical matter (not tested), if the trustees appear to violate the trust's instructions, many advisers would terminate their relationship to avoid any potential liability.

A deceased former client of yours had established an irrevocable trust. Under the terms of the trust, you were appointed trustee, and the beneficiaries are the client's three adult children. The terms of the trust state that the goal of the trust is reasonable income with a secondary objective of preserving capital for the next generation. After several years, the beneficiaries complained that the asset mix is too stodgy and instead of income, the portfolio needs to become more aggressive. Under the UPIA, A) your first obligation is to follow the directions of the trust. B) you should resign and have the successor trustee deal with the issue. C) you should re-evaluate the portfolio to determine if the trust is fulfilling its objectives. D) your first obligation is to follow the wishes of the beneficiaries.

A) your first obligation is to follow the directions of the trust. Under the UPIA, the trustee's first obligation is to follow the terms of the trust. The beneficiaries' interests are best followed by complying with the conditions stated by the grantor of the trust (the deceased client). On a regular basis, the trustee (you in this case), should do a portfolio evaluation, but that is not the focus of the question. This question is basically asking, "Who does the trustee listen to: the trust instructions or the beneficiary and it is the trust?"

Richard, Tim, Sam, and Fred have a regular golf foursome every weekend. During one of their outings, they decide it is time they did something constructive with their money by opening an account with a brokerage firm. If the account is opened tenants in common, suitability information would be required on A) only that individual with the authorization to trade the account B) each of the four individuals C) whichever person has been designated by the group as its spokesman D) each of the individuals, and if married, their spouses

B) each of the four individuals On any joint account, it is required to obtain suitability information on all of the account owners.

Which of the following statements about S corporations is not correct? A) Stockholders of S corporations are taxed on the net profits of the corporation even if they do not receive taxable dividends. B) An S corporation may have only one class of stock. C) S corporation status offers greater opportunity for raising additional capital than do other forms of business structure. D) An S corporation may have no more than 100 shareholders.

C) S corporation status offers greater opportunity for raising additional capital than do other forms of business structure. S corporations are flow-through vehicles, so any earnings are taxable to shareholders, whether or not they are paid out as dividends. An S corporation may have no more than 100 shareholders and may issue only one class of stock, so its ability to raise large amounts of capital is rather limited.

You are working with a client who received her divorce earlier this year. She has two young children, ages four and seven, who both live with her. In general, it would be most advantageous for the client to file her federal income tax claiming what status? A) Joint B) Single C) Married but separated D) Head of Household

D) Head of Household Taxpayers claiming the Head of Household (HH) filing status benefit from a higher standard deduction and lower tax rates than single taxpayers. There are several requirements that must be met to qualify for HH status. Some of them include the following: The taxpayer is unmarried or is considered unmarried on the last day of the year. A qualifying person lived in the home with the taxpayer for more than half the year (except for temporary absences, such as school). This is generally the taxpayer's child or children. Because she is divorced, your client can't claim either joint or married but separated status. As stated above, filing as HH offers many tax advantages over filing as single.

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from A) the person appointed as administrator of the estate. B) the person with a durable power of attorney. C) the person named as executor of the estate. D) the spouse.

A) the person appointed as administrator of the estate. Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.

Small corporations that satisfy certain criteria can elect not to pay income tax at the corporate level but instead pass their earnings through to their shareholders. These corporations are known as A) C corporations. B) S corporations. C) Q corporations. D) R corporations.

B) S corporations. The type of small corporation that can elect not to be taxed at the corporate level but to pass its earnings through to its shareholders is an S corporation. The term S corporation comes from the subchapter of the Internal Revenue Code that governs these corporations (Subchapter S). The other type of corporation—the C corporation—is one that has not elected to be treated under Subchapter S. Its earnings are taxed at the corporate level and again at the individual level when they are paid out as dividends.

Which of the following is an example of a regressive tax? A) Sales tax B) Income tax C) Gift tax D) Estate tax

A) Sales tax Regressive taxes are those where the rate remains the same, regardless of the cost of the item subject to the tax. For example, if your state has a 6% sales tax, it makes no difference if you are buying an item for $1 or $10,000—the tax rate is the same 6%. The other choices given are progressive taxes, where the tax rate increases as the dollar amount being taxed increases.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes I. name II. oral assurance that the customer is of legal age III. a street address, unless the primary mailing address is a PO Box located in the state of residence IV. a taxpayer identification number A) II and III B) I and II C) III and IV D) I and IV

D) I and IV Mere oral assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.

Three sisters are interested in forming a business together. They have three initial concerns 1. maximizing their benefits from the fact that the business is not expected to earn money for at least the first two years; 2. making sure that the business will be able to continue in the event that one or two of the sisters dies; and 3. minimizing their personal liability for the obligations of the business. On the basis of the sister's concerns, which form of business is appropriate for the situation? A) LLC. B) C corporation. C) Limited partnership. D) General partnership.

A) LLC. The limited liability company (LLC) will allow losses to flow through to the sisters, continue in the event one or two sisters should die, and have the same type of liability protection as offered by a C corporation.

Under the provisions of the Internal Revenue Code, which of the following business forms is not required to file a separate tax return? A) Sole proprietorship B) Limited partnership C) S corporation D) LLC

A) Sole proprietorship In the case of a sole proprietorship, any tax consequences (income or loss) are reported on the owner's personal Form 1040, Schedule C. The other entities file either a Form 1065 (limited partnership and LLC) or a Form 1120S (S corporation). Although a one member LLC is treated like a sole proprietorship, unless that was stated as a choice, the LLC has multiple members.

Suzie McQueen has a very successful interior design shop she has run as a sole proprietorship. She has just celebrated her 60th birthday and has been giving thought to an eventual sale of the business. She wants your opinion on whether she should incorporate or change to a partnership. You might respond that A) the corporate form of business structure would be the easiest for ultimate transfer of ownership B) the corporate form of business structure would be the least expensive to form C) the partnership form of business structure would be the easiest for ultimate transfer of ownership D) the partnership form of business structure would enable Suzie to maximize her sale price

A) the corporate form of business structure would be the easiest for ultimate transfer of ownership In general, the corporate form of business leads to the easiest transfer of ownership. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock.

XYZ, Inc. is a C corporation in the 21% federal income tax bracket. Which of the following investments offers the company the highest after-tax return? A) Corporate bond with a 6.75% coupon B) ABCD, Inc. preferred stock paying a 6% dividend C) REIT paying a 6.5% dividend D) Municipal bond with a 5% coupon rate

B) ABCD, Inc. preferred stock paying a 6% dividend The key to this answer is that corporations have a 50% dividend exclusion on dividends received from other companies. The math looks like this: Only half of the 6% dividend is taxable. That means 3% per year is tax free and the other 3% is subject to tax at the 21% rate. So, we have 3% + 79% of the taxable 3% = 3% + 2.37% = 5.37% after-tax return. The municipal bond is not taxed, but that only produces 5% after tax. The corporate bond is subject to 21% tax so the corporation gets to retain the other 79%. That computes to 6.75 x 79% = 5.33%, just a bit less than the preferred stock. In most cases, dividends paid to corporations by REITs are fully taxable. That makes the after-tax return on the 6.5% dividend only 5.14%.

A deceased client's trust account has over 90% of its value invested in a single common stock whose recent performance has been outstanding, resulting in a very large unrealized capital gain at the time of death. What action would most likely be taken by the investment adviser handling this account? A) Continuing to hold that stock position if it is felt that it meets the objectives of the trust B) Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death C) Selling all of that stock in order to rebalance the trust's assets D) Exchanging a portion of that stock for a suitable security held in the adviser's trading account

B) Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death Under current tax law, a beneficiary inherits assets at their fair market value as of the time of death. This is known as a stepped-up basis (probably because these assets are generally at a higher price than when originally purchased). In this question, we are told that there is a large unrealized gain. Therefore, with a portfolio that is overconcentrated in one security, it would make sense to diversify while, at the same time, avoiding or minimizing capital gains taxes. It would be against the provisions of the UPIA for a fiduciary to ever engage in trading from his own account.

If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend? A) Corporate bond B) Treasury bond C) Industrial revenue bond D) General obligation bond

D) General obligation bond Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A general obligation (GO) bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the alternative minimum tax (AMT).

J.B. Rich founded Rich, Inc., and he owns a substantial block of stock with a very low cost basis. Which of the following statements are true regarding the disposition of J.B.'s stock? I. If it is given away, the recipient of the gift assumes J.B.'s cost basis. II. If it is given away, the recipient of the gift receives a stepped-up basis to the market value as of the date of the gift. III. If it is inherited, the beneficiary assumes J.B.'s cost basis. IV. If it is inherited, the beneficiary receives a stepped-up basis to the market value as of the date of J.B.'s death. A) I and IV B) II and IV C) I and III D) II and III

A) I and IV It is much better to inherit appreciated securities than to receive them as a gift. In the case of a gift, the done (recipient) takes over the donor's cost basis. Upon death, assets in the estate receive a stepped-up basis to current market value, thereby avoiding capital gains on the appreciated low cost basis stock.

A number of corporations offer dividend reinvestment plans (DRIPs) where the client's dividends are automatically reinvested in additional shares of the issuer. In the case of a company that pays dividends with some degree of regularity, if the market price per share has declined over the year and assuming no splits, an investor participating in one of these plans would find which of the following to be true? A) There are more shares in the investor's account. B) There are fewer shares in the investor's account. C) The value of the investor's account has gone down. D) The value of the investor's account has gone up.

A) There are more shares in the investor's account. With the dividends reinvested, there will be more shares. Although the market price per share has declined, we don't know the aggregate account value (with the additional shares), so we don't have enough information to tell if the overall value has risen or declined.

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can A) have a check drawn on the account payable to the trustee for trustee expenses. B) have funds withdrawn from the account at the direction of the beneficiary. C) place the securities in the trust fund in a noncustodial brokerage account. D) arrange to have the trust's funds pledged to support a loan for the trustee.

A) have a check drawn on the account payable to the trustee for trustee expenses. The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts.

An investor has made the following purchases, all in the same calendar year: 100 ABC at $20 on January 15; 200 ABC at $25 on April 4; and 100 ABC at $30 on July 23. With ABC currently selling at $22, if this investor needed to sell 200 ABC, the best decision from a tax standpoint would probably be to A) use LIFO. B) hold the stock until the price reaches $25. C) use FIFO. D) use average cost.

A) use LIFO. The best decision from a tax standpoint is to arrange things to show the largest loss. Remember, losses can be used against gains, and if there are more losses than gains, up to $3,000 of that loss can reduce taxable income. Using a form of share identification known as LIFO (last-in, first-out) enables the investor to designate the 100 shares purchased at $30 in July and 100 of the shares purchased at $25 in April. That will result in a short-term capital loss of $1,100 ($800 on the July shares purchased at $30 plus $300 on the April shares purchased at $25). That loss may be used either against realized gains or, if this is the investor's only transactions, deducted in full against ordinary income. The average cost method is available only for mutual funds. If this investor used FIFO (first-in, first-out), the sale would be of the 100 shares bought in January at $20 per share and 100 of the shares bought in April at $25 per share. The sale of the January purchase would result in a $200 gain ($22 - $20 = $2 and $2 × 100 shares). The sale of the April purchase results in a $300 loss ($22 - $25 = -$3 and -$3 × 100 shares). Combining them generates a net loss of $100. From a tax standpoint, declaring a loss of $1,100 is preferable to declaring a loss of $100.

An investor purchases 100 shares of ABCE common stock at $70 per share. Thirteen months later, the stock is sold when the market price is $50 per share. Which of the following activities made 20 days after the sale of the stock at $50 per share would not violate the wash sale rule? A) Purchasing 100 shares of ABCE common stock B) Purchasing an ABCE put option C) Purchasing five ABCE convertible bonds with a conversion price of $50 D) Purchasing an ABCE call option

B) Purchasing an ABCE put option The wash sale rule applies when the same or substantially identical security as a stock sold at a loss is acquired within the 30-day period prior to and after the sale. Buying a put is not a problem because the put allows the holder only to sell the stock, not to buy it. Please note that a bond convertible at $50 is convertible into 20 shares, so five bonds will enable the investor to convert into 100 shares.

If a trust has been established under which the father is to receive income for life and his son is to receive the trust principal on the father's death, which of the following statements is true? A) The trustee does not need to keep records of the income distributions to the father. B) The trustee is not required to notify the son when an income distribution is made to the father. C) The trustee must notify the son each time an income distribution is made to the father. D) The trustee can withhold income distributions to the father to preserve principal to the son.

B) The trustee is not required to notify the son when an income distribution is made to the father. It is not required that the trust's remainder beneficiary be notified when income is distributed from the trust. The trustee must report distributions from the trust for federal income tax purposes. The trustee must follow the terms of the trust, making distributions as required by the trust instrument.

Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? I. 150 new investors buy into the corporation during the year. II. 1 new member is a nonresident alien. III. 50% of the corporation's income is derived from passive investments in limited partnerships. IV. The corporation issues several classes of stock. A) I only B) I and II C) I, II, III, and IV D) I, II, and III

C) I, II, III, and IV S corporations must not have more than 100 stockholders, and each stockholder must be a citizen or resident of the United States. The corporation can only have 1 class of stock, and no more than 25% of the corporation's income can come from passive activities. If you were not aware of this last fact, a useful test-taking technique is recognizing that all the other choices are correct and there is no way to select them without this one.

The basis of an asset received from a decedent's estate is referred to as a stepped-up basis. This means that the asset's basis is generally A) the fair market value of the asset on the day the decedent acquired it B) the amount the recipient ultimately sells the asset for. C) the fair market value of the asset on the day the decedent died. D) the amount the decedent originally paid for the asset.

C) the fair market value of the asset on the day the decedent died. Generally, a taxpayer's basis in an asset is the amount the taxpayer paid for the asset. When an asset is acquired by inheritance, however, the asset's basis is generally the fair market value of the asset on the date of the decedent's death (or six months after the date of death if the estate elects the alternate valuation date). Because this value is often higher than the price the decedent originally paid for the asset, this kind of basis is called a stepped-up basis.

An individual opens an account with your firm. She tells you that upon her death, she wants any assets in the account to be divided equally among her three children. She also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than the others, but she does not want to incur any significant legal expense. You would suggest that the account be opened A) under a discretionary power. B) as a joint account with tenants in common. C) as a joint account with right of survivorship. D) as an individual TOD account.

D) as an individual TOD account. TOD, the term used for transfer on death, will allow this client to fulfill her wishes.