QFC Tax Planning & Preparation 3

Question 1

A private equity fund uses a 'tax blocker' corporation when investing on behalf of foreign limited partners. What is the primary purpose of this structure?

Accepted Answer

To prevent foreign investors from being subject to US effectively connected income (ECI) and FIRPTA withholding

Answer

Tax blocker corporations shield foreign investors from US ECI taxation and FIRPTA withholding by converting pass-through income into corporate dividends subject only to withholding tax.

Question 2

Under the 'constructive receipt' doctrine, when must a cash-basis taxpayer recognize income?

Accepted Answer

When income is credited to the taxpayer's account or made available without restriction

Answer

The constructive receipt doctrine requires recognition when income is credited, set apart, or otherwise made available to the taxpayer without substantial restriction.

Question 3

An investor contributes $100,000 of appreciated stock (basis $20,000) to a Donor Advised Fund (DAF). What are the tax consequences?

Accepted Answer

Deduction of $100,000 FMV and no capital gains tax on the appreciation

Answer

Contributing long-term appreciated securities to a DAF allows the donor to deduct the full FMV and permanently avoid capital gains tax on the built-in appreciation.

Question 4

What is the 'alternative minimum tax' (AMT) preference item most commonly triggered by exercise of incentive stock options (ISOs)?

Accepted Answer

The spread between the exercise price and FMV at exercise date

Answer

For AMT purposes, the bargain element (FMV minus exercise price) at ISO exercise is an AMT preference item even though it is not recognized for regular income tax.

Question 5

Which transfer pricing method is generally considered the most reliable under IRC §482 and OECD guidelines when a comparable uncontrolled price exists?

Accepted Answer

Comparable Uncontrolled Price (CUP) Method

Answer

The CUP method is the most direct and preferred transfer pricing method when reliable comparable uncontrolled transactions exist because it directly benchmarks the price.

(QFC) Quantitative Finance Certification Practice Test

(QFC) Quantitative Finance Certification Practice Test

QFC Tax Planning & Preparation 3