TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
11th Edition
College Course Materials
Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®
Associate Professor
CFP® Program Director
Personal Financial Planning Department
University of Missouri-Columbia
Please Note: Correct answers for each question are indicated in bold type. After each question,
the number of the page containing information relevant to answering the question is given. When
a calculation is necessary or the reasoning behind a given answer may be unclear, a brief
rationale for the correct answer is also given.
Part B: Employee Benefit Planning
Cash Compensation
Chapter 31: Cash Compensation Planning
True/False
31.1
As a general rule, the IRC does not allow a tax deduction for a publicly held corporation for
compensation in excess of $1,000,000 for the company CEO.
31.2
One method that a corporation can use to justify reasonableness of compensation is to cite
local and national economic conditions that were favorable to increased sales of the
company’s profit
31.3
An employer using the accrual method can take a deduction for compensation for services
not rendered before the end of the taxable year for which the deduction is claimed.
Answers:
31.1 true [p. 271]
31.2 true [p. 272]
31.3 false [p. 273]
Multiple Choice
31.4
Advantages of cash contributions include:
a.
b.
c.
d.
e.
greater certainty of receipt than with deferred compensation
reduction of unknown or uncertain costs for employer
employer receives a tax deduction for any level of cash contribution
all of the above
only a and b
Answer: E [p. 271]
31.5
Planning of cash contributions is most relevant for which of the following types of
business?
a.
b.
c.
d.
e.
sole proprietorship
partnership
unincorporated business
S corporation
C corporation
Answer: E [p. 271]
31.6
Which of the following is (are) true regarding timing of corporate deduction for
compensation payments
a.
b.
c.
d.
e.
an employer must deduct current compensation at the time it is accrued
whether an amount is treated as current or deferred depends on the type of employee
a more than 50% owner of the corporation cannot take advantage of safe harbor rules
all of the above
only a and b
Answer: D [p. 273-74]
Application
31.7
Late last year, a hurricane along the North Carolina coast devastated several costal towns.
Rebuilding efforts in the region earlier this year have boosted profits of nearby Benson
Lumber company triple of what they were the previous year. The CEO and two highly paid
executives at Benson have an established agreement with the company that returns 30%
of net profit to them in addition to their base salary. If demand continues through the rest
of the year, the three top executives at Benson will receive 3 times last year’s salary.
Benson’s best case for establishing “reasonableness of compensation” is:
a.
b.
c.
d.
e.
nature and scope of duties of executive group
comparison with compensation paid to executives in comparable fields
size and complexity of the business enterprise
company compensation policy for all employees
local and national economic conditions
Answer: E [p. 272]
31.8
Zeb Zander is owner and sole shareholder of Zeb Co. This year, Zeb Co. generated
$500,000 in income. The IRS disallowed $150,000 of compensation deduction and treated
it as nondeductible dividends. Which of the following is true:
a.
b.
c.
d.
e.
Zander owes tax and 10% penalty on $150,000
Zeb Co has $350,000 income taxed at corporate rates
Zander has $150,000 dividend income taxed at his marginal tax rate
Zander has $150,000 dividend income taxed at 15%
Zeb Co has $500,000 income taxed at corporate rates
Answer: D [p. 272-73]
31.9
The owner of Windom Enterprises has asked you to identify a tax free compensation
option that could be used to avoid the reasonableness of compensation issue for their
executives and upper level managers. As the owner’s financial advisor, you suggest:
a.
b.
c.
d.
e.
a nonqualified deferred compensation plan
a restricted stock plan
a health plan for all employees
$100,000 of group term life insurance for the CEO and upper level managers
educational assistance plans for the dependents of the CEO and upper level managers
Answer: E [p. 274]
31.10 Landrum manufacturing has had several lean years. Recently, however, product demand
has increased. Profits have doubled every year for the past three years, primarily due to
the efforts of the owner and two key employees. The owner wants to build a case that the
recent steep increases in her compensation and the compensation of her two key
employees is reasonable. As her financial advisor, you tell her that her best option is to:
a.
b.
c.
d.
e.
determine compensation levels mid-year as the profit trend becomes clear
document determinants of salary in minutes from board meetings
pay a proportion of compensation in the form of stock to the owner and key employees
pay low dividends on stock issue to owner and key employees
document nature and scope of duties for all employees
Answer: B [p. 272, 375]