NASAA Series 66 — All Questions

A founder buys newly issued shares of a qualifying small C corporation in 2026 and sells them after holding them for exactly four years. Under current Section 1202, what percentage of the eligible gain may be excluded?

• a.0%, because the stock must be held more than five years
• b.50%
• c.75%✓
• d.100%

For qualified small business stock acquired after the 2025 amendment, the exclusion is tiered: 50% of eligible gain after three years, 75% after four and 100% after five or more. The old all-or-nothing test of more than five years applies only to stock acquired on or before the applicable date, so a four-year holder of newer stock is not shut out.IRC Sec. 1202(a)(1)(B) and (a)(6)

Under current Section 1202, what is the maximum amount of aggregate gross assets a C corporation may have, before and immediately after the stock issuance, for its stock to be qualified small business stock?

• a.$10 million
• b.$25 million
• c.$50 million
• d.$75 million✓

A qualified small business must be a domestic C corporation whose aggregate gross assets never exceeded $75 million before the issuance and do not exceed that amount immediately afterward. Earlier law used a $50 million ceiling, and the $10 million figure is the old per-issuer gain cap, a different limit.IRC Sec. 1202(d)(1)

A taxpayer closes on the sale of a rental building on March 1, 2026 as the relinquished property in a like-kind exchange, using a qualified intermediary. Assuming the tax return due date does not shorten the period, what are the deadlines to identify and to receive the replacement property?

• a.Identify by March 31, 2026 and receive by May 30, 2026
• b.Identify by April 15, 2026 and receive by August 28, 2026✓
• c.Identify by April 15, 2026 and receive by December 31, 2026
• d.Identify by April 30, 2026 and receive by September 30, 2026

The replacement property must be identified within 45 days and received by the earlier of 180 days or the due date of the return for the year of transfer. Forty-five days after March 1 is April 15, and 180 days after March 1 is August 28. The end-of-year date confuses this with a calendar-year convention that the statute does not use.IRC Sec. 1031(a)(3)

After 2017, which of the following exchanges can qualify for nonrecognition treatment under Section 1031?

• a.One mutual fund exchanged for a similar mutual fund
• b.A rental house traded for farmland, both held for investment✓
• c.A family's principal residence traded for a vacation cottage used only by the family
• d.A delivery truck used in a business traded for a newer truck

Section 1031 now covers only exchanges of real property held for productive use in a trade or business or for investment, for real property of like kind. Equipment and securities are no longer eligible, and property held for personal use, including a vacation home used only by the owner, was never within the rule.IRC Sec. 1031(a)(1)

An heir inherits stock on March 1 and sells it on June 1 of the same year for more than its value at the decedent's date of death. How is the gain classified?

• a.Long-term, because inherited property sold within one year of death is treated as held for more than one year✓
• b.Short-term, unless the decedent held the stock for more than one year
• c.Short-term, because the heir held the stock for only three months
• d.Not taxable, because the heir's basis was stepped up to the sale price

When an heir's basis is determined by the date-of-death rule and the property is sold within one year after the decedent's death, the heir is deemed to have held it for more than one year. The holding period is therefore long-term regardless of how brief the heir's own ownership was. The step-up applies to the value at death, so appreciation after death is still taxable.IRC Sec. 1223(9)

Which describes the statutory limits on a charitable remainder trust?

• a.The annual payout is fixed by statute at 7%, and the charity's remainder interest must be worth at least 20% at funding
• b.The annual payout must be between 5% and 50%, and the charity's remainder interest must be worth at least 10% at funding✓
• c.The annual payout must be at least 10%, and the charity's remainder may be of any value
• d.The annual payout must be between 2% and 20%, and the charity's remainder interest must be worth at least 5% at funding

A charitable remainder trust must pay at least 5% and no more than 50% of the initial value (annuity trust) or annually revalued value (unitrust) to a noncharitable beneficiary at least annually. The present value of the charity's remainder must also be at least 10% of the property's value when contributed. Both limits are required, and the payout is chosen within the range by the grantor.IRC Sec. 664(d)(1)(A), (d)(1)(D), (d)(2)(A), (d)(2)(D)

An employee is granted incentive stock options this year on shares with a fair market value of $140,000 at the grant date, and all of the options first become exercisable this year. No other options are outstanding. How are the options treated?

• a.All of the options are incentive stock options, because they were granted as such
• b.Options on $100,000 of stock are incentive stock options, and options on the remaining $40,000 are treated as nonqualified options✓
• c.Options on $70,000 of stock are incentive stock options, with the remaining $70,000 split evenly between nonqualified and phantom treatment
• d.None of the options are incentive stock options, because the plan exceeded the limit

Incentive stock options are limited to $100,000 of stock, measured by fair market value at grant, that first becomes exercisable in any calendar year. The excess is treated as nonqualified options, applying the options in the order granted. The plan does not lose its status entirely, and no 'phantom' treatment exists in the statute.IRC Sec. 422(d)

An employee who owns 12% of the voting power of the employer is granted an incentive stock option when the stock's fair market value is $20.00 per share. To qualify as an incentive stock option, what must be true?

• a.The exercise price must be at least $20.00 and the option must expire within five years of grant
• b.The exercise price must be at least $20.00 and the option must expire within ten years of grant
• c.The exercise price must be at least $22.00 and the option must expire within five years of grant✓
• d.The exercise price must be at least $22.00 and the option must expire within ten years of grant

For an employee owning more than 10% of the voting power, an incentive stock option must have an exercise price of at least 110% of fair market value at grant and cannot be exercisable after five years. The ordinary ISO term is ten years and the ordinary price floor is 100% of grant-date value, so each wrong choice mixes one ordinary condition with one ten-percent-owner condition.IRC Sec. 422(c)(5)

An investor sells 100 shares for $30 per share, realizing a loss because the shares cost $50 per share. Ten days later the investor buys 100 substantially identical shares for $28 per share. What is the tax basis of the new shares?

• a.$5,000
• b.$3,000
• c.$2,800
• d.$4,800✓

The loss of $2,000 is disallowed as a wash sale, and the basis of the replacement shares is the old basis adjusted by the difference in prices. Old basis of $5,000, plus the $2,800 paid, minus the $3,000 received, equals $4,800, which is the $2,800 cost plus the $2,000 deferred loss. Using only the purchase price would permanently lose the deferred loss.IRC Sec. 1091(a) and (d)

A client invests $600 on the first day of each of three consecutive months into the same fund at prices of $20, $15 and $12 per share. What is the client's average cost per share?

• a.$15.00✓
• b.$15.67
• c.$16.00
• d.$12.00

The client buys 30, 40 and 50 shares, 120 shares for $1,800, so the average cost is $15.00. The simple average of the three prices is $15.67, but that overstates cost because a fixed dollar amount buys more shares when the price is low, which is the arithmetic advantage of dollar-cost averaging.NASAA Series 66 Content Outline, Topic III (portfolio management techniques: dollar-cost averaging)

A portfolio's long-term policy allocation is 60% stocks and 40% bonds. A manager temporarily raises stocks to 70% because short-term valuations appear attractive, with a plan to return to 60% afterward. This is an example of:

• a.Strategic asset allocation
• b.Dollar-cost averaging
• c.Tactical asset allocation✓
• d.Rebalancing to the policy target

Tactical asset allocation deliberately and temporarily departs from the policy mix to exploit perceived short-term opportunities. The 60/40 policy itself is the strategic allocation, rebalancing would move the portfolio back toward it, and dollar-cost averaging concerns investing equal dollar amounts over time.NASAA Series 66 Content Outline, Topic III (strategic vs. tactical asset allocation)

At the start of an economic recovery, an adviser shifts a portion of a client's portfolio from utilities and consumer staples into industrials and consumer discretionary stocks, expecting the latter groups to lead. This technique is best described as:

• a.Sector rotation✓
• b.Immunization
• c.Constant-ratio rebalancing
• d.Tax-loss harvesting

Sector rotation moves capital among industry groups in anticipation of the business cycle, favoring cyclical sectors early in an expansion and defensive ones late in it. Immunization matches bond duration to a liability, constant-ratio rebalancing restores fixed weights, and harvesting is about realizing losses for tax purposes.NASAA Series 66 Content Outline, Topic III (portfolio techniques: sector rotation)

A retirement analysis using Monte Carlo simulation reports an 85% probability of success for a client's withdrawal plan. What does that figure represent?

• a.In 85% of the simulated return sequences, the portfolio lasted through the planning horizon✓
• b.The client has an 85% chance of outliving the portfolio's guaranteed income
• c.The portfolio is expected to earn 85% of its target return each year
• d.85% of the portfolio will remain after the planning horizon ends

A Monte Carlo simulation runs many randomized return paths and counts the share in which the plan's goal is met. A success rate is a probability across scenarios, not a forecast of return, a portion of assets left over, or a guarantee. A plan with 85% success still fails in about one path in seven.NASAA Series 66 Content Outline, Topic III (retirement planning analysis)

A client who owns an IRA pledges the account as security for a personal loan. How does the Internal Revenue Code treat the pledge?

• a.Nothing is treated as distributed unless the lender actually seizes the assets
• b.The entire IRA loses its tax-exempt status as of the first day of the year
• c.The pledge is permitted if the loan is repaid within 60 days
• d.The portion of the account pledged is treated as distributed to the owner✓

Using an IRA, or any part of it, as security for a loan causes the pledged portion to be treated as distributed to the owner, which is taxable and may carry the early-distribution penalty. Disqualification of the whole account is the result of a prohibited transaction under Section 4975 instead, which is a different rule. The 60-day rule belongs to rollovers.IRC Sec. 408(e)(4)

An IRA owner engages in a transaction prohibited by Section 4975 with respect to their own IRA. What is the consequence for the account?

• a.The account ceases to be an IRA on the first day of the following year
• b.The account becomes a Roth IRA automatically
• c.The account ceases to be an IRA as of the first day of that taxable year✓
• d.Only the amount involved in the transaction is taxed, and the IRA continues

For an IRA owner or beneficiary who engages in a prohibited transaction with the account, the whole account stops being an IRA as of the first day of the taxable year in which it happened. That treatment is harsher than the partial treatment applied when only a pledge is made, and there is no automatic conversion to a Roth.IRC Sec. 408(e)(2)

An IRA buys a set of antique rugs and a stamp collection for a total of $30,000. How does the Internal Revenue Code treat the purchase?

• a.As a nontaxable rollover into a collectibles account
• b.As a distribution to the owner in the amount of the cost, $30,000✓
• c.As a permitted investment, because antiques and stamps are tangible assets
• d.As a prohibited transaction that disqualifies the IRA only if the coins are held at home

The acquisition of a collectible by an IRA is treated as a distribution equal to its cost. Collectibles include artwork, rugs, antiques, metals, gems, stamps, coins and alcoholic beverages. The location of storage does not change the rule, and no rollover treatment applies. Only specified coins and bullion held by a trustee are excepted by the statute, and rugs and stamps are not among them.IRC Sec. 408(m)(1) and (2)

A single taxpayer sold a principal residence two years ago and excluded the gain. The taxpayer now sells a different principal residence owned and used for four years, with a $180,000 gain. Under Section 121, what is the result?

• a.The full $180,000 is excluded, because the limit is $250,000
• b.The full $180,000 is excluded, because only a home owned fewer than two years is limited
• c.The exclusion is unavailable, because another sale used it within the last two years✓
• d.$125,000 is excluded, which is half the single filer's limit

The exclusion does not apply when another sale to which it applied occurred within the two years ending on the sale date. Ownership and use of four years satisfy the two-of-five test, and $180,000 is under the $250,000 cap, but the once-every-two-years rule overrides both. A partial exclusion applies only in limited circumstances such as a qualifying move.IRC Sec. 121(b)(3)

A plan sponsor wants a default investment fund to receive fiduciary relief under the Department of Labor's qualified default investment alternative rule. When must participants receive the initial notice?

• a.At least 90 days before plan eligibility, with no further notice required
• b.On or after the first investment in the fund, with notice repeated every three years and no requirement that it precede the participant's eligibility
• c.Within 60 days after the first investment, and only if the participant asks
• d.At least 30 days before plan eligibility or before the first investment in the fund, with annual notice at least 30 days before each plan year✓

The QDIA rule requires a notice at least 30 days before eligibility or the first default investment, or on the eligibility date if the participant can take a penalty-free withdrawal, and a further notice at least 30 days before each later plan year. After-the-fact or on-request notices do not satisfy it, and the rule has no 90-day lead time.29 CFR 2550.404c-5(c)(3)

A 529 plan account has been maintained for the beneficiary for more than 15 years. What is the lifetime limit on rollovers from the account to the beneficiary's Roth IRA?

• a.$10,000
• b.$100,000
• c.$35,000✓
• d.$7,000

The 529-to-Roth rollover is available for an account maintained for 15 years, limited to the amount contributed more than five years earlier, subject to the annual IRA contribution limit, and capped at $35,000 over the beneficiary's lifetime. The lower figures are annual-limit-type amounts, and $100,000 is not a statutory figure for this rollover.IRC Sec. 529(c)(3)(E)

A donor gives cash to a public charity in a year, and separately gives long-term appreciated stock to the same charity. Which statement about the deduction limits under Section 170(b) is correct?

• a.Cash gifts are generally limited to 60% of the donor's contribution base, and gifts of appreciated capital gain property to 30%, with excess carried forward five years✓
• b.Both are limited to 50% of adjusted gross income, any excess is lost permanently, and appreciated stock is deductible only at the donor's cost basis rather than market value
• c.Cash is limited to 30% and appreciated stock to 60% of contribution base
• d.There is no limit on either as long as the charity is a public charity

Cash contributions to public charities are allowed up to 60 percent of the contribution base, while gifts of capital gain property are generally capped at 30 percent. Excess amounts carry forward for five succeeding years rather than expiring, and the two caps are not reversed.IRC Sec. 170(b)(1)(C) and (G)

A domestic private foundation that is not an operating foundation must, to avoid a tax on undistributed income, generally distribute each year an amount based on what percentage of its non-charitable-use assets?

• a.2%
• b.10%
• c.1.39%
• d.5%✓

The minimum investment return, from which the distributable amount is built, is 5 percent of the net fair market value of assets not used directly for exempt purposes. The 1.39 percent figure is the excise tax on net investment income, a different item.IRC Sec. 4942(e) and (d)

What is the federal excise tax rate on the net investment income of a domestic tax-exempt private foundation?

• a.0%, because foundations are tax-exempt
• b.2%
• c.1.39%✓
• d.5%

Since 2019 the single rate is 1.39 percent of net investment income. The earlier 2 percent rate and its reduction for higher payouts were repealed, and tax-exempt status does not remove this excise tax.IRC Sec. 4940(a)