COMPENSATION & RETIREMENT PLANNING HOMEWORK
1.
On June 1, 2007, Shack Corporation sold 1,000 of its common shares to Rick, an
employee, for $10 per share. The stock was worth $25 per share on the grant date. The sale was
subject to Rick’s agreement to resell the stock to Shack at its original cost if Rick terminates
employment within the next three years. The stock was worth $45 per share on June 1, 2010.
Rick sold the shares for $50 per share on October 3, 2010.
Answer the following questions, assuming (a) the §83(b) election was not made, and (b) the
§83(b) election was made by Rick.
No §83(b) election
§83(b) election
a. What is the amount and character of income Rick
recognizes on June 1, 2007?
b. What is the amount and character of income Rick
recognizes on June 1, 2010?
c. What is the amount and character of income Rick
recognizes on October 3, 2010?
d. What and when is Shack Corporation’s allowable
deduction?
2.
On March 15, 2008, Judy was granted options for 1,000 shares of common stock at $5
per share. On the grant date, the options had no readily ascertainable market value. On July 1,
2009, Judy exercised the options when the stock was selling for $15 per share. She later sold all
1,000 shares on November 2, 2010 for $35 per share.
Answer the following questions, assuming (a) the options are NQSOs, and (b) the options are
ISOs.
NQSOs
ISOs
a. What is the amount and character of income Judy
recognizes on March 15, 2008?
b. What is the amount and character of income Judy
recognizes on July 1, 2009?
c. What is the amount and character of income Judy
recognizes on November 2, 2010?
d. What and when is the employer’s allowable
deduction?
3. Jane and Bill, who have been married for six years, each contribute $5,000 to a traditional
IRA. In each of the following cases, compute the couple’s deduction for these contributions.
a. Neither spouse is an active participant in a qualified retirement plan, and their AGI is
$95,000.
b. Bill is an active participant in his employer’s qualified retirement plan, but Jane is not.
The couple’s AGI is $95,000.
c. Both spouses are active participants in their respective employer’s retirement plan, and
their AGI is $95,000.
d. Neither spouse is an active participant in a qualified retirement plan, their AGI is
$110,000, and their contributions are to a Roth IRA.
4. Monica establishes an IRA at age 40 and contributes $2,000 per year for 25 years. The
account is now worth $99,000, consisting of $50,000 in contributions plus $49,000 in
accumulated earnings. How much of these funds may Monica withdraw tax-free under the
following assumptions?
a.
Roth IRA
b.
Traditional IRA
c.
Traditional IRA, and $20,000 was after-tax contributions.