Question

Which of the following are characteristics of Stock Bonus Plans?
a. Protect a company from hostile takeovers
b. Provide a market for the owner’s closely held shares of stock
c. Provide a tax advantage to employees through Net Unrealized Appreciation d. Provide tax deductions while having no effect on cash flow

1. i and ii only

2. i, iii and iv only

3. ii, iii, and iv only

4. All of the above

What percentage of company stock must the ESOP own after a stock purchase in order for the seller to obtain non-recognition of gain treatment?

a. 85%

b. 50%

c. 30%

d. 25%

In order to qualify for non-recognition of gain treatment, which of the following would be a qualified replacement security?

a. S&P 500 index fund
b. Porsche Automobile Holding American Depository Receipt (ADR) c. UPS common stock
d. Louisiana general obligation bonds

Answer 1

Ans.1). All given options are correct. Stock bonus plans can act as a deterrent against a hostile takeover. They allow the owner's shares to be remain within the employees of the company. They do provide a tax advantage to employees and allow tax deductions for companies.

Ans.2). The ESOP must own 30% of the company stock after a stock purchase so that the seller qualifies for non-recognition of gain treatment.

Ans.3). A qualified replacement security has to be a security of a domestic operating corporation. It has to be incorporated in the U.S. Out of the given options, UPS common stock can be a qualified replacement security.