FINAL REVIEW Flashcards

Question

Installment Payment Interest Rate

Answer 1

IRS will NOT accept whatever interest rate is chosen to be used in the installment contract on which the seller and buyer agree There is imputed interest and rates published by the Treasury; the AFR (applicable fed rate) a low rate, may be used depending on the terms of the agreement

Answer 2

A buyer will prefer a tax-free asset purchase over a tax-free stock purchase because the asset purchase would receive a higher potential basis

Answer 3

Determine amount of excess earnings by dividing the tangible assets by expected ROR Excess earnings divided by expected ROR equals the value of key employee

Answer 4

The DB should be selected to reflect the key person's value to the business Corp must provide notice to key person and obtain the key person's consent Policy can be used to fund a NQ deferred comp plan w/ retirement benefits if the key person lives to retirement Corp owns the policy, pays the premiums and is the beneficiary Premiums NOT deductible to corp as a reasonable business expense Key person's value to the business cannot be forecasted indefinitely

Answer 5

Ccorps/Scorps/LPs required to file documents of organization; GPs are not required to do so Ccorps/Scorps/partnerships have either a separate tax status or file an informal tax return; SPs do NOT

Answer 6

Provides continuity of the business, limited liabilities to shareholders, transferability of ownership interests and lower marginal tax rates NOTE: at complete corporate liquidation, a corporate distribution of property to shareholders generally recognize gain in the property for which they pay income tax

Answer 7

Assume no contractual liability for legal contracts formed by corp Generally not liable to shareholders for errors in judgement even if they used reasonably prudent standards

Answer 8

Subject to limitations, pass-through entities (SPs/partnerships/Scorps) can take a 20% tax deduction for qualified business income (QBI), this deduction may be positively impacted for high income owners if there are significant W-2 wages or investments in qualified property

Answer 9

Can create retirement plan for themselves similar to corporate retirement plan Can deduct losses incurred in business from their AGI from other sources May not deduct premiums for group term life insurance on their own life

Answer 10

Property rights in a partnership property continue after partnership is dissolved Termination of a partnership is not the same as dissolution in legal terminology

Answer 11

Stock Redemption Buy/Sell: Professional corps typically redeem the stock of a deceased SH Liquidation: at the liquidation of a professional service corp, if the IRS imputes a goodwill value, it will be added to the capital gain to be recognized by SHs

Answer 12

Average earnings divided by expected ROR

Answer 13

Business organized as corporations under state law will be taxed as corporations; so will "unincorporated" entities such as banks, insurance companies, state and foreign owned entities

Answer 14

Income to the owners of a closely-held business can be in the form of compensation for services provided as a director or EE, as well as income in return for capital invested in the business

Answer 15

If the executor of a deceased SP gets the consent from all heirs and creditors to continue the business, the executor is liable for acting in a negligent manner and incurring business losses

Answer 16

Provides for the payment of estate taxes in 10 installments; 1st installment of principal MUST be paid 5 years after the date the federal estate tax return is due; w/ payments being made over the next 9 years and estate kept open until installments are paid ***Section 6166 would not be used if an insured buy/sell agreement is in place

Answer 17

"Specific Performance" serves as an effective judicial remedy for surviving partners if there has been a breach of the buy/sell w/ the deceased partner's estate

Answer 18

The estate of the insured should not be listed as the beneficiary because the estate would hold both the deceased's business interest and the life insurance policy proceeds, ALSO, The deceased's shareholder's business interest and the life insurance policy proceeds might be subject to claims against the estate

Answer 19

Family attribution rules provide a tax burden for a senior family member who wants to transfer their business interest to heirs Family attribution rules: a SH whose stock has been redeemed by the corp will have stock attributed to them if owned by their spouse, child or grandchild, NOT BY A GRANDPARENT Family attribution rules can be waived so long as the individual whose stock is redeemed agrees to the following over the 10 year period following redemption: a. Not serve as an officer of the corp b. To acquire NO stock in the corp unless inheritance or bequest c. Notify IRS if a prohibited interest in the corp happens d. NOTE: the former stockholder may become a creditor to the corp

Answer 20

Stock transferred into a GRAT: Ex. 5 yr trust, annuity payments for 5 yrs At end of 5 yrs, grantor's son receives the stock The transfer IS subject to gift taxation If grantor dies before trust pays out and is terminated, the principal of the trust is included in the grantor's estate

Answer 21

Closely-held family business, is a stock redemption agreement preferable to a cross purchase agreement? Not necessarily INC wants to hold purchase price down in their buy/sell and wonders if the life insurance funding will inflate the value of the stock: is a stock redemption agreement preferable to cross purchase agreement? Not necessarily

Answer 22

If a SH in a close corp enters into a contract that allows the corp an option to buy their shares in the event of their death: a. Option is not enforceable b. Option agreement can provide a price or a price formula

Answer 23

Installments instead of a lump sum payment/purchase is an advantage because the IRS allows capital gains treatment on the sale as installments are paid Interest on installment payments is not considered tax-free to the seller

Answer 24

Loss Prevention = risk management technique to reduce the chance of loss Insurance and risk management is NOT concerned w/ "speculative risk" Insurable Risk = a risk where losses are definite in regards to amount and time

Answer 25

For an ER to receive favorable tax treatment for contributions to a salary continuation (disability income) plan, the plan does not need to be funded by DI insurance and the plan does not need to cover all employees Payments from plan are taxable for EE ER receives a tax deduction for benefit payments from a plan

Answer 26

An installment sale may be designed to remove stock from the seller's estate but unpaid installment payments before the seller's death are included in the estate The IRS will NOT accept just any interest rate used in the installment contract on which the seller and buyer agree

Answer 27

Very useful estate planning tool for a business owner and it can accomplish a lot of things, but providing retirement income for the owner is NOT one of them

Answer 28

No deduction for premiums paid by ER Benefits are taxed to EE

Answer 29

Transfer restrictions will decrease the value of preferred stock Fringe benefits to EEs do not result in a tax credit IRS does NOT provide a mathematical formula for determining maximum reasonable compensation

Answer 30

The value of a minority stock interest in a closely-held business can be discounted, but this is not the case in a publicly-traded corporation Cumulative voting may enable minority shareholders to get representation on the corp's BOD

Answer 31

Economic effects of the liquidation of a partnership following the death of a partner: interfering w/ the surviving partner's careers a shrinkage of partnership assets a delay in the settlement of a deceased partner's estate

Answer 32

A business owner may experience difficulty in planning to transfer their ownership to family successors d/t anti-estate freeze statutes that have added uncertainty and transfer tax costs to many traditional transfer techniques

Answer 33

To be treated as a capital transaction, a Section 302 stock redemption can be substantially disproportionate w/ respect to the shareholder whose stock is redeemed and it can be a complete redemption of all stock the corp owned To qualify as substantially disproportionate, a redemption must reduce the SH to below both (1) 50% of ownership and (2) 80% of their prior holdings

Answer 34

If no stock redemption agreement exists, the executor or administrator has the right to vote for then deceased SH If there is no buy/sell agreement in a close corp, it may be difficult for the heirs of a minority SH to sell the corporate stock following their death Surviving SHs are favored over a deceased SH's heirs if an option agreement is in place that sets out a predetermined price

Answer 35

If no buy/sell, their personal representative has a duty to complete unfinished obligations that do not require the sole proprietor's personal performance SP buy/sell w/ a key employee funded w/ life insurance: key employee should be the life insurance policyowner AND beneficiary If key employee cannot afford premiums, options can be bonus the amount or set up a split-dollar insurance arrangement

Answer 36

the trustee does not necessarily have to pay the premiums on the policies

Answer 37

Death proceeds to fund a stock redemption agreement are not taxable to the corp even if a transfer-for-value occurred when the policy was transferred to corp Sec. 79 life insurance proceeds are received by a named beneficiary income tax free

Answer 38

If a partnership has an insured binding cross purchase buy/sell agreement, it should include provisions stating the ownership, beneficiary arrangements, and premium payment details for all policies funding the agreement; including the "first offer commitment or restriction" to sell to other partners first

Answer 39

In an entity partnership buy/sell agreement, if there is specific language that provides for a definite and reasonable amount of the total price to be for goodwill, it does not affect the taxation to the seller; and the payment is NOT deductible for partnership income tax purposes

Answer 40

In forming a partnership, the initial contribution does NOT have to be substantial; it can be property or cash; and the contribution is NOT a taxable event

Answer 41

In a cross-purchase partnership buy/sell agreement, the beneficiary of a life insurance policy should be the policyowner

Answer 42

Even when a partnership buy/sell agreement sets a formula for the price of the business, and even if there is insurance in place, there can still be a problem of underfunding

Answer 43

General partners are liable for the partnership's losses; liability extends to all assets of the partner Limited liability partners are not liable for partnership losses but can lose all of their partnership interest if the partnership loses all of its assets in a lawsuit

Answer 44

In a general partnership, current year operating losses can be deducted for federal income tax purposes

Answer 45

Partnership's distributive share: a partner is taxed on entire distributive share and a partner's basis in the partnership will be increased by the amount of a distributive share that is reinvested in the partnership

Answer 46

Limited partners share in the future income of the business; NOT in the capital contributed, the operations, the personal liability for the business's debts

Answer 47

Extra expense insurance = designed to indemnify for additional costs of operations necessary as a result of destroyed physical facilities, NOT the costs to rebuild Dependent business interruption insurance = covers a business owner's lost profits from a supplier's premises being destroyed by fire... DEPENDENT...SUPPLIER

Answer 48

A private annuity can be designed to be excluded from the seller's estate for tax purposes A tax-free stock sale ("B" reorganization) involves a sale made solely for the buyer's voting stock "Residual disability" benefits provision gives the insured an incentive to go back to work A disabled SH does NOT lose the right to vote their stock

Answer 49

Entity approach provides pooling and makes the transaction more affordable for the lower-interest younger partners; entity agreement is probably more practical where partners have unequal ages and relative interests The entire partnership interest is included in the estate, including the value of its goodwill The cost basis received by the survivor is greater in a cross-purchase agreement The partnership should be the designated beneficiary

Answer 50

The proprietor has unlimited liability for business operations The business terminates by operation of law at the bankruptcy of the proprietor Title to specific business property is held by the proprietor A proprietor cannot be considered an EE for tax purposes

Answer 51

The price set represents the fair value of the business at the time of the agreement The contract to buy and sell is an arm's-length transaction The buy/sell agreement contains a first-offer provision

Answer 52

An LLC differs from a limited partnership because all owners of an LLC have limited liability The organizational formalities of an LLC can cause significant legal costs

Answer 53

Provision should be made for the disposition of the insurance policies held by the decedent's estate on the lives of the survivors The buyers get the purchase price included in their basis in the stock The agreement should contain a first-offer provision to peg the business value for estate tax purposes The corporation has no obligation under a cross-purchase agreement, and such payments could be taxed as dividends

Answer 54

The surviving shareholders get control of the corporation w/out interference from the deceased shareholder's heirs Policies used to fund the agreement accumulate cash value tax free Proceeds are received tax free by the corp on the death of a SH w/out the imposition of the transfer-for-value rule The estate must include the stock held by the deceased; the estate merely transfers the stock for the insurance proceeds

Answer 55

The election is terminated if there are more than 100 shareholders in any taxable year The election is not terminated if any of the stock is held by a voting trust in any taxable year Each shareholder is taxed on their share of the corp's income whether or not it is distributed A Subchapter S election will continue unless a majority of the shareholders vote to terminate the election

Answer 56

Uses earnings projection over future years rather than being based on past years' figures; however past income data may be significant in making the projection

Answer 57

An estate must be holding closely held corporate stock valued at more than 35% of the adjusted gross estate to qualify for a Sec. 303 redemption Family attribution rules do not apply to a Sec. 303 redemption

Answer 58

A GRAT is normally a grantor trust and income is taxable to the grantor until the trust terminates; even if it is not structured as a grantor trust, the current income taxes are shared by the grantor and the trust All or a portion of the GRAT's principal will be included in the grantor's gross estate for tax purposes of their death occurs before the trust terminates

Answer 59

The decedent's brother who is an unpaid beneficiary of the estate The residuary beneficiary of the estate The trust established by the decedent during his lifetime that is an unpaid beneficiary of the estate NOTE: the income tax regulations provide that a person is no longer considered an estate beneficiary after they have been paid in full and there is only a remote possibility that the person will have to return the property to satisfy a claim against the estate; however, stock is attributed from an unpaid beneficiary of the estate to the estate regardless of the relationship; moreover, the residuary beneficiary is considered an unpaid beneficiary until the estate is closed

Answer 60

The EE's specialized skills Compensation paid to other EEs w/ similar duties in the firm Compensation paid to EEs of other firms w/ similar duties NOTE: salary should be based on the EE's services rather than the ownership interest

Answer 61

Blockage discount Minority discount Liquidation discount

Answer 62

Noncancelable contracts provide guaranteed premium rates Residual disability benefits are provided as long as income is diminished because of a disability even if the insured returns to work part-time

Answer 63

A corporation cannot exist unless it has been chartered by the government A corporation usually has the power to acquire its own stock to the extent of its available surplus A SH is not liable for the debts of a corporation A SH has no basic right to any allocable share of corporate profits; corporate profits are received by a SH only when the corporation's BOD declares the distribution of those profits in the form of a dividend

Answer 64

The buyer's basis for the stock is equal to the total selling price not including the interest paid At death, for federal estate tax purposes, the gross estate includes the present value of any unpaid installments on an installment note held by the decedent

Answer 65

Stockholders effectively bear the premium burden under both cross-purchase and stock-redemption plans W/out a buy/sell agreement a SH's death could result in an involuntary revocation of the subchapter s election A buy/sell agreement has no impact on the corporation's exposure to the accumulated-earnings tax The S corporation is not subject to corporate level tax rates

Answer 66

A participant incurs taxable income to the extent that the face amount of coverage on their life exceeds $50,000 Key employees will be taxed on the entire amount of their coverage if the plan discriminates in either coverage or benefits The taxable amount of coverage is subject to tax based on the so-called Table 1 rates contained in Sec. 79 regulations Groups w/ fewer than 10 members can receive the tax benefits of Sec. 79, but they are subject to more stringent nondiscrimination requirements

Answer 67

A tax-free B (stock) reorganization requires that 80% or more of the stock in the acquired corporation must be exchanged Substantially all the assets must be sold in a tax-free asset sale

Answer 68

Weighted average annual earnings divided by required ROR

Answer 69

Plans may discriminate The insured may be the direct beneficiary

Answer 70

When stock is purchased from a deceased SH under a cross-purchase plan, there will be an increase in the purchasing SH's total basis for their stock in the corporation The sale of stock at death pursuant to an insured cross-purchase plan results in sale-or-exchange tax treatment The payment of life insurance premiums is a nondeductible expense in either a cross-purchase or stock-redemption agreement The proceeds will never be taxable income to the estate of an insured in a buy/sell agreement

Answer 71

The policies must be owned by the corp or subject to claims of general creditors of the corp to avoid adverse income tax results Benefits received by participants taxable as compensation Premium payments are not deductible since benefits are deductible when paid to the recipient after the deferral Death benefits are part of the participant's estate and they can name the beneficiary

Answer 72

A partnership pays no income taxes Although the partnership agreement will generally control the tax consequences, the IRS will disregard any provision whose principal is tax avoidance

Answer 73

Shareholder-employees may be eligible for more tax-favored fringe benefits More favorable treatment of EE fringe benefits for more-than-2-percent shareholder-employees

Answer 74

The agreement typically requires more policies than a stock-redemption plan The corporation is not a party to the cross-purchase agreement and has no responsibility for the purchase of a deceased SH's stock

Answer 75

Expected to have annual earnings $75K; amount earned above $75K can be attributed to goodwill

Answer 76

The multi-state ER should secure "other states" coverage to be sure that the coverage is adequate under the laws of every relevant state Traditional liability requirement of fault is not required

Answer 77

To allow SH holding a minority interest to have the best opportunity to elect at least one director

Answer 78

It is given capital gain treatment if the redemption meets the requirements of a substantially disproportionate redemption Sec. 302 provides rules for determining when a redemption qualifies as "substantially disproportionate"

Answer 79

The participating employee is the owner of the policy covering their life Permitted to discriminate The bonuses are taxable current compensation to the participant ER is able to deduct reasonable bonuses paid to the EE, regardless of how the EE uses the bonus

Answer 80

The FLP is potentially useful to transfer business or other family investments to the next generation at a discounted transfer tax cost Most partnership laws would include investment partnerships as a valid partnership Technique normally involves the transfer of the senior family member's property through gifts of limited interest to successor generations The general partnership interest provides control over management, distributions, and liquidations and is NOT a minority interest

Answer 81

EE is taxed on contributions for coverage in excess of a $50K DB Sec. 79 has complex nondiscrimination rules

Answer 82

A closely held business in excess of 35% of the adjusted gross estate must be included in the gross estate to qualify The estate must be kept open during the installment period The estate may use Sec. 303 redemptions to make the installment payments Only interest needs to be paid for the first 5 years

Answer 83

Compensation of shareholder-employees will be treated as a dividend unless it represents a reasonable and ordinary business expense Reasonable compensation is determined by many factors and is often a subjective and illusory target The choice of fringe benefits often hinges on the personal needs of the owners and the differing tax benefits available for various fringes Bonus payments made w/in 2 and a half months after the close of the tax year can be deducted by a corporation in the previous tax year if the obligation was fixed in the prior year

Answer 84

Workers' compensation statutes place strict liability on ERs to respond to certain injuries or illnesses suffered by EEs Corporate directors are subject to liability claims brought by corporate SHs in behalf of the corporation if directors' actions injure the corporation Liability concerns have led many business owners to form LLCs Partners are both jointly and severally liable

Answer 85

A corporation may retain earnings in the year of a SH's death for a 303 redemption w/out an accumulated-earnings tax penalty The redemption can be made later when tax payments are made The threshold amount for qualification is 35% for representation of the adjusted gross estate for the estate to qualify Amounts limited to estate taxes and deductible funeral expenses, NOT charitable contributions

Answer 86

The heirs may wish to stay in the business The survivors may be unable to finance the sale *above points are correct disadvantages **Both situations are inconsistent w/ a mandatory buy/sell agreement

Answer 87

Assets are valued as close to current fair market value as possible The addition of an amount for goodwill to assets is usually part of the adjustment This method is recommended for companies that primarily hold investment products and real estate Earnings are not considered in book value

Answer 88

Partnership owns the policies The partnership is beneficiary of the policies The partnership pays the premiums Generally the life insurance proceeds are free of federal income tax

Answer 89

The buyer's depreciation basis for the assets is equal to the purchase price The SHs of the selling corporation have no taxable income from the asset sale itself SH approval may be necessary In an asset sale, courts have held buyers personally liable for seller liabilities in some cases

Answer 90

The premium costs are nondeductible The appropriate insured is an individual w/ unique skills or substantial personal business contacts The transfer of the policy to the EE at retirement is excepted from the transfer-for-value rules The insurable interest in life insurance need only exist at the inception of the contract, and the corporation is free to retain the policy

Answer 91

The proceeds can assist in reducing the liquidity burden w/out adding to the estate taxes The proceeds can provide income to the surviving spouse and an inheritance to heirs who will not inherit the business

Answer 92

Helps prevent the transfer of stock to purchasers outside of the closely held SHs

Answer 93

Shrinkage in the value of partnership assets Danger to the surviving partner's business career Delay in the administration of the deceased partner's personal estate Surviving partner or partners become the liquidating trustee(s), and this role generally is opposed to continuing the business

Answer 94

This method may be impractical if the owner is concerned about providing income to an inactive surviving spouse Providing income for a surviving spouse generally calls for a different transfer method since it would be difficult for the business to provide indefinitely for an inactive surviving spouse following an owner's death

Answer 95

The administrator may have difficulty getting the consent of all interested parties Administrator can charge reasonable fee for services but does not share in profits Administrator is acting as a sole proprietor under these circumstances The heirs have the right to consent to actions when the administrator deals personally w/ the estate

Answer 96

The redemption amounts should be distributed only if the corporation has sufficient surplus Life insurance premiums are NOT deductible Policies are owned as part of regular corporate assets, subject to claims of corporate creditors Policies are exempt from the accumulated-earnings tax only if they are accumulated for a reasonable business purpose

Answer 97

The are formed and operated under auspices of state law They generally adopt pass-through income tax treatment

Answer 98

It is appropriate to discount future earnings related to goodwill Lower credence should be attributed to more distant forecasts

Answer 99

The book value may be more appropriate than other measures to a liquidating business Book value often inadequately gives the true value of assets

Answer 100

The purchaser acquires the corporation subject to its assets and liabilities A stock sale is typically simpler since shares of stock rather than physical assets are transferred The acquiring corporation gets a basis in the assets of the acquired corporation equal to the basis of the assets in the hands of the seller The buyer need only find enough SHs who will agree to sell their stock

Answer 101

A closely held corporation is often limited by practical circumstances of its ownership structure in the amount of funds it can raise; closely held corporations often provide no advantage in raising funds General partners must be active Sole Proprietor may personally borrow funds to be used in the business The limited partnership is one method of organizing to raise substantial funds

Answer 102

The agreement must have a bona fide business purpose The agreement cannot be a device to transfer to family for less than full consideration The terms must be comparable to similar arm's-length agreements A fixed purchase price is NOT a statutory requirement

Answer 103

Proprietorships outnumber other forms of business by almost 3 to 1 The proprietor typically has limited ability to raise funds for business expansion The proprietor can delegate business authority to agents and employees Proprietors are self employed and are not eligible for tax-favored status under IRC Sec. 79 group term life insurance plans

Answer 104

The decedent's estate contains other substantial assets

Answer 105

To a closely held corporation in which the insured is a SH To a partner of a partnership in which the insured is also a partner To a partnership in which the insured is a partner If transferred to a SH of a corporation in which the insured is also a SH presents adverse tax consequences

Answer 106

It is more equitable to consider the value of the insurance in the ultimate purchase price The formula price fluctuates and would only coincidentally correspond to the purchase price at the time of death

Answer 107

The death of a general partner Closely held corporation is a separate entity that continues unless actively terminated at the death of a SH

Answer 108

Corporate officers are not individually liable for corporate actions Corporations are empowered and regulated under state law

Answer 109

A portion of the installment payments will incur a special 2% interest rate An eligible estate must hold a closely held business interest whose value is greater than 35% of the adjusted gross estate The sale of the business by the heirs accelerates the remaining installment payments The installment period is limited to 15 years, but an executor may elect a shorter period

Answer 110

A cross-purchase agreement should be selected if the surviving partners expect to sell their interests during their lifetimes An entity agreement may solve the affordability problem if one partner is significantly older than the others An entity agreement should be selected if there are large number of partners included in the agreement The transfer of life insurance to a partnership in which the insured is a partner is excepted from the transfer-for-value rule

Answer 111

Some earnings are to be retained for business expansion Owner/employees want to benefit from tax-favored group life insurance Owners desire to be sheltered from the liability risks associated w/ business operations The dividend treatment given to distributions to passive SHs is unattractive vis-a-vis the partnership pass through taxation concept

Answer 112

The dividends paid by the corporation will be distributed first to the preferred stock The preferred stock normally will not have voting rights but, at the very least, will not have preferred voting rights

Answer 113

The corporation owns the life insurance policies, pays the premiums, and is the beneficiary of each policy The corporation is distributing the redemption proceeds, and the survivors get no basis as a result

Answer 114

S corporations typically avoid corporate-level taxes

Answer 115

The parent can provide for inactive heirs since the state will receive substantial sale proceeds The active heirs will be the designated buy/sell purchasers The parent holds the business interest until death The family attribution problem will generally be troublesome to the estate if designed as a stock redemption and sale or exchange treatment may be difficult to achieve; a cross-purchase would avoid this problem

Answer 116

The payments made by the partnership to the estate are treated as liquidation payments for tax purposes The insurance funding tends to inflate the partnership value and should be considered in the valuation provision

Answer 117

Installment payments are easier to finance by the buyers Installment-type payments more closely match disability insurance income payments The seller is able to spread the taxable gain over the installment period The form of payment does not have an impact on estate includability

Answer 118

The taxation of S Corps has similar aspects to the partnership tax LLCs can generally choose to be taxed as partnerships The owners of an unincorporated trade or business may be eligible for a 20% deduction from qualified business income (QBI) w/ certain restrictions The 20% deduction from QBI is available for an unincorporated service business but may be limited or eliminated once the business owners taxable income reaches certain threshold amounts

Answer 119

The heirs may be willing to accept the decedent's stock in lieu of specific bequests Minority SHs cannot force liquidation The corporation has continuity of its own The survivors do not have the voting power to control the BOD

Answer 120

The sophisticated methods for determining value will take into account the cost of replacing the key employee The key employee's value may be different from their salary The traditional methods are often incomplete Goodwill can also be attributed to other factors such as brand loyalty or the favorable location of the business

Answer 121

A covered EE need not report the premiums paid by the employer as income Benefits are taxable as ordinary income because they are compensation

Answer 122

First determine profit ratio = gain divided by the contract price Then multiply the profit ratio times the principal installment payment

Answer 123

Most owners of closely held corporations are actively involved in business management NOTE: closely held corporations must generally follow corporate operating formalities

Answer 124

The agreement provides the survivors w/ the freedom to operate w/out unwanted heirs as coshareholders The survivors receive no cost basis for the amount of the redemption distribution

Answer 125

The key employee may be identified by a specialized skill The key employee's value often includes a goodwill element The key employee may have unique sales skills The true value of a key employee should consider that the EE will ultimately retire and cease services to the business

Answer 126

Loss reduction techniques are designed to reduce the financial impact of losses once they occur Speculative risks are uninsurable Only pure risks are insurable Risk avoidance is NOT a transfer of the risk but the elimination of the risk

Answer 127

At least one general partner must exist Limited partners cannot take an active role

Answer 128

SHs of closely held corporations can be compensated either by salary or dividend payment Partnerships do NOT have to distribute distributive share amounts

Answer 129

A holding company One of the most difficult aspects of the ABV method is the valuation of intangible assets such as goodwill; most appropriate for those least likely to have intangible assets

Answer 130

Mom has other heirs who need to be provided for Mom has a marital deduction will w/ a unified-credit bypass share Mom's other assets include several illiquid items Buy/Sell would NOT be used if Mom is substantially rated and likely to become uninsurable

Answer 131

Risk identification is often a sophisticated process involving the financial statements of the business Some types of risk transfer involve the contractual shifting of risk to third parties other than insurers

Answer 132

Corporations are authorized solely by state law and are required to follow certain operating formalities Corporate rates are not higher at all levels of income The general partner must have unlimited liability Ownership control disputes are possible any time there is more than one owner in partnerships

Answer 133

The partners have the authority to dissolve the partnership and liquidate partnership assets at the death of one partner The property is owned in undivided equal interests as tenancy in partnership The surviving partners become liquidating trustees and are likely to have a technical dissolution The partners must consent to the sale of business assets

FINAL REVIEW Flashcards

(161 cards)