Concepts in Federal Taxation 2016 23rd Edition Murphy Test Bank

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Concepts in Federal Taxation 2016 23rd Edition Murphy Test Bank

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1. An operating loss occurs when an entitys deductions exceeds the income generated for the period.
a. True
b. False
ANSWER: True

2. A transaction loss occurs when an asset is disposed of at less than its basis.
a. True
b. False
ANSWER: True

3. A corporation has a net capital loss. The significance of a net capital loss in 2015 for a corporation is that it can be carried back 3 years and carried forward 5 years by a corporation to offset capital gains in other taxable years.
a. True
b. False
ANSWER: True

4. The term tax shelter refers to investment property that involves residential and commercial real estate.
a. True
b. False
ANSWER: False

5. Lu-Yin purchased her consulting business with $75,000 of her own funds and she borrowed $125,000 from the local bank. If she is personally responsible for the loan, she is at risk only for $50,000.
a. True
b. False
ANSWER: False

6. Material participation requires that an individual participates in an activity for more than 200 hours per year or spends more than 50 hours a year in the activity and the time spent is more than anyone else spends on the activity.
a. True
b. False
ANSWER: False

7. Virginia owns a business that rents power equipment to construction companies. Despite maintaining, delivering, and picking up the equipment, Virginias business is passive since it is a rental activity.
a. True
b. False
ANSWER: False

8. While most rental activities are classified as passive, an exception is low-income housing.
a. True
b. False
ANSWER: True

9. Portfolio income consists of unearned income from dividends, interest, royalties, annuities, and other assets held as investments.
a. True
b. False
ANSWER: True

10. A closely held corporation cannot offset net passive losses against income of the business.
a. True
b. False
ANSWER: False

11. Dwight owns an apartment complex that has a $30,000 loss. His adjusted gross income is $85,000 before the loss. Since he qualifies as an active participant he may deduct $25,000.
a. True
b. False
ANSWER: True

12. Leon is allowed to deduct all the current and suspended losses on his passive activity if he sells his entire interest in the passive activity during the year.
a. True
b. False
ANSWER: True

13. John discovers that termites have destroyed the front porch of his office building. The damage occurred over a 3-year period. He is eligible for a casualty loss deduction.
a. True
b. False
ANSWER: False

14. The Baskerville Corporation has a net $6,500 capital loss during the current taxable year. They will be able to deduct $3,000 this year and carries the remaining $3,500 forward.
a. True
b. False
ANSWER: False

15. Any corporate capital loss not used in the current year can be carried back 2 years and carried forward 20 years to offset capital gains in those years.
a. True
b. False
ANSWER: False

16. Constance owns a boutique. During the current year, she has gross income of $400,000 and allowable deductions related to the business of $425,000.
I. Constance has incurred a transaction loss, which represents her unrecovered cost of capital.
II. Constance has suffered an annual loss, which may be carried back 2 years or forward 20 years if not used in the current year.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

17. Barry owns all of the stock of Jerrico Corporation; an internet based gaming firm. Barry is also the President of and works full-time for Jerrico. During the current year, Jerrico has a loss of $125,000 from its operations.
I. If Jerrico is an S Corporation, Barry may deduct the loss on his personal tax return as a deduction for AGI.
II. If Jerrico is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20 years.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

18. Perry owns all of the stock of Sound Corporation. Perry is also the President of Sound and works full-time running Sound. During the current year, Sound has a loss of $75,000 from its operations.
I. If Sound is an S Corporation, Perry deducts the loss on his personal tax return as a deduction from AGI.
II. If Sound is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20 years.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

19. Kenneth owns all of the stock of Kearney Corporation. Kenneth is also the President of Kearney and works full-time running the corporation. During the current year, Kearney has a loss of $40,000 from its operations.
I. If Kearney is an S Corporation, the corporation may carryback the loss 2 years (and obtain a refund of taxes paid) with any remaining loss carried forward 20 years.
II. If Kearney is a regular corporation, Kenneth may deduct the loss for AGI on his personal tax return because the corporation is a flow through entity.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: d

20. Baker Corporation suffers a net operating loss (NOL) of $65,000 in 2014. Baker was incorporated in 2012. Baker had a NOL of $20,000 in 2012 and taxable income of $35,000 in 2013. The corporation expects a taxable income of $200,000 in 2015. What valid alternatives are available to Baker concerning the $50,000 loss?
I. Baker can carryback the loss to 2015 and will receive a refund of $2,250.
II. Baker can elect to carryforward the loss and expect to receive tax savings of $19,500.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

21. Carmen purchased a business for $150,000 by investing $40,000 of her own funds and borrowing $110,000 from Local National Bank. Carmen signed the note payable as a personal guarantor. In the first year of operations the business had an operating loss of $120,000. During the second year, the business has an operating loss of $45,000. How much of the year two loss is deductible against Carmens income from other business activities? Assume that Carmen materially participates in the business.
a. $- 0
b. $15,000
c. $30,000
d. $45,000
e. $120,000
ANSWER: c

22. Sullivan, a pilot for Northern Airlines, has adjusted gross income of $92,000 before considering the following losses. The passive activity rules disallow the deduction for a loss in which of the following?
I. Sullivan has a $4,500 loss from his ownership interest in Cowco, a feeder-cattle limited partnership. Sullivan is a general partner and is responsible for day-to-day management decisions.
II. Sullivan has a $7,000 loss from his ownership interest in Swineco, a feeder-pig limited partnership. Sullivan is a limited partner.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

23. Maria, an engineer, has adjusted gross income of $167,000 before considering the following losses. The passive activity rules disallow the deduction for the loss in which of the following?
I. Maria has a $21,000 loss from her ownership of Family Apartment Village, a low-income housing project.
II. Maria owns and actively participates in managing a rental house across the street from East State College. This activity generates a $7,000 loss in the current year.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

24. If an individual is not a material participant, a rental activity is considered passive. However, certain rental activities are not deemed to be rentals for passive loss purposes even if the individual is not a material participant. Which of the following is not excluded from the passive loss rules?
a. Golf cart rentals.
b. Hotel rooms.
c. Jet ski rentals.
d. Apartment rentals.
e. Construction equipment rentals.
ANSWER: d

25. Pedro owns a 50% interest in a limited partnership that operates an apartment complex. During the current year, the partnership generates a taxable rental loss of $42,000. Pedros other sources of income are salary of $55,000 and interest of $18,000. What is Pedros allowable loss from the apartment?
a. $ 0
b. $18,000
c. $21,000
d. $25,000
e. None of the above.
ANSWER: a

26. Jose, Mahlon, and Eric are partners in New Communications Partnership. Jose owns a 50% interest, Mahlon owns a 35% interest, and Eric owns a 15% interest. During the current year (the first year of operation for the enterprise), the business has a loss. Although the partnership is established as a general partnership, Jose functions as the manager and performs all of the day-to-day duties of a chief operating officer. Mahlon and Eric are merely investors who receive monthly reports about the business. At the close of the current tax year, each partner will receive a share of the partnership loss. Which of the partners will be able to deduct his (their) share of the partnership loss?
I. Jose
II. Mahlon
III. Eric

a. Mahlon
b. Jose, Mahlon, and Eric
c. Jose
d. Jose and Mahlon
e. Mahlon and Eric
ANSWER: c

27. During 2015, Pamela worked two jobs. She performed financial consulting activities for 1,000 hours and real estate development and rental activities for 1,200 hours. Her real estate development and rental activities produced a loss of $35,000. Her financial consulting generated a net business income of $40,000. How much of the loss can Pamela deduct against her financial consulting income?
a. $-0-
b. $17,500
c. $25,000
d. $35,000
e. $40,000
ANSWER: a

28. During the current year, Alyssa incurred a net loss of $27,500 from a 5 percent interest in a partnership that operated and managed an office building. Alyssa had adjusted gross income from other sources of $110,000 and spent 67 hours assisting in the management of the building. Determine Alyssas total adjusted gross income for the current year.
a. $82,500
b. $90,000
c. $100,000
d. $105,000
e. $110,000
ANSWER: e

29. Kenzie and Ross equally own rental real estate. The rental property generated a loss of $20,000. Kenzie is also employed as a part-time Tupperware salesperson and full time as a real estate agent. For her share of the loss to be fully deductible, she must:
I. Not have an adjusted gross income in excess of $100,000.
II. Spend more than 750 hours, in total, as a realtor
III. Spend more than 100 hours managing the rental activity, and spend more time than Ross.
IV. She must spend more than 50% of her time as a realtor and must own more than 5% of the real estate agency.

a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I and II are correct.
d. Statements II, III, and IV are correct.
e. Statements I, II, III, and IV are correct.
ANSWER: d

30. Travis is a 30% owner of 3 rental houses. He spends 625 hours a year managing the properties. In addition, he owns a 20% interest in a real estate business to which he devotes 1,800 hours a year. The rental units generate a total loss of $22,000, and Travis adjusted gross income in the current year, before considering the rental properties, is $120,000. How much of the loss can Travis deduct?
a. $- 0
b. $4,500
c. $6,600
d. $15,000
e. $22,000
ANSWER: c

31. Susan is the owner of a 35-unit apartment complex. She spends 950 hours a year managing the property. In addition, she works part-time for a mortgage company. She spends 1,150 hours a year as a bookkeeper at the mortgage company. The apartment complex generated a loss of $32,000, and Susans adjusted gross income for the current year, before considering the apartment complex, is $48,000. How much of the loss can Susan deduct?
a. $- 0
b. $14,476
c. $16,727
d. $25,000
e. $32,000
ANSWER: d

32. A passive activity
I. includes an interest in a limited partnership held by a limited partner investor.
II. includes a working interest in an oil and gas deposit.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: a

33. A passive activity
I. includes any trade or business in which a taxpayer does not materially participate.
II. includes rentals of apartment buildings, rental houses, etc., where no significant personal services are involved.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

34. Which of the following must be classified as portfolio income?
I. Dividend income from an investment in Lincoln Corp. common stock.
II. Royalty income from the ownership of the mineral rights on land. The taxpayer does not share the expenses with the extraction company.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

35. Which of the following must be classified as portfolio income?
I. Interest income on CDs from First National Bank.
II. Loss realized from the sale of one-half of his stock shares in Lockleed Corp. Lockleed is qualified small business stock.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

36. A taxpayer had the following for the current year:
Active Portfolio Passive
Income Income Income
Income $75,000 $22,000 $55,000
Deductions (45,000) (16,000) (110,000)
Income(Loss) $30,000 $6,000 $(55,000)

I. If the taxpayer is a closely held corporation, taxable income from the three activities is income of $6,000.
II. If the taxpayer is an individual and the passive income is not related to a rental real estate activity, taxable income is $36,000.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

37. If a taxpayer has the following for the current year:
Active Portfolio Passive
Income Income Income
Income $75,000 $22,000 $55,000
Deductions (45,000) (16,000) (110,000)
Income(Loss) $30,000 $6,000 $(55,000)

I. If the taxpayer is a regular corporation, taxable income from the three activities is a loss of $19,000.
II. If the taxpayer is an individual and the passive income is related to a rental real estate activity in which the taxpayer is an active participant, taxable income is $11,000.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

38. Salvador owns a passive activity that has a basis of $44,000 and a suspended loss of $18,000. Salvadors taxable income from active and portfolio income is $55,000. If Salvadors sells the passive activity for $56,000 how will he report the transaction on his tax return?
I. Salvador will report an ordinary loss of $18,000.
II. Salvador will report a capital gain of $12,000.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

39. During the year, Aimee reports $30,000 of active business income, $15,000 of income from passive activity X, and a $25,000 loss from passive activity Y. Determine the tax consequences of these events.
I. The $15,000 income from activity X can offset $15,000 of the loss from activity Y.
II. Any passive loss that is not deducted in the current year is suspended.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

40. Janine is an engineering professor at Southern College. Her annual salary is $110,000. She owns two 3-unit apartment buildings near the university. Because of the proximity to campus, Janine actively manages the property. During the current year, the rental of the property produced a $29,500 loss. How much of the loss may Janine deduct for the current year?
a. $- 0
b. $14,750
c. $20,000
d. $25,000
e. $29,500
ANSWER: c

41. Nancy is the owner of an apartment complex. She actively participates in the management of the building. During the current year, it generates a taxable loss of $27,000. Nancys other sources of income are salary of $52,000 and interest of $21,000. What is Nancys allowable loss from the apartment?
a. $- 0
b. $18,000
c. $25,000
d. $27,000
e. None of the above.
ANSWER: c

42. Nelson is the owner of an apartment complex. He actively participates in the management of the building. During the current year, it generates a taxable loss of $33,000. Nelsons other sources of income are salary of $148,000 and interest of $12,000. What is Nelsons allowable loss from the apartment?
a. $- 0
b. $ 1,000
c. $12,000
d. $25,000
e. $33,000.
ANSWER: a

43. Bowden is a single individual and has the following income (loss) for the current tax year:
Salary $85,000
Dividends and interest 24,000
Actively managed rental property (23,000)

What is Bowdens adjusted gross income for this year?
a. $ 85,000
b. $ 86,000
c. $ 88,500
d. $ 89,500
e. $109,000
ANSWER: c

44. Karl has the following income (loss) during the current year:
Net business income $45,500
Dividends and interest 12,000
Actively managed rental property (34,000)

What is Karls adjusted gross income for this year?
a. $23,500
b. $31,400
c. $32,500
d. $45,500
e. $57,500
ANSWER: c

45. Natalie is the owner of an apartment complex. She actively participates in the management of the building. During the current year, it generates a taxable loss of $33,000. Natalies other sources of income are salary of $114,000 and interest of $16,000. What is Natalies allowable loss from the apartment in the current year?
a. $-0-
b. $10,000
c. $15,000
d. $16,000
e. $25,000
ANSWER: b

46. Tim owns 3 passive investments. During the current year, he has the following income and loss from each activity:
Activity 1 $(7,000)
Activity 2 (3,000)
Activity 3 4,000

What is the amount of suspended loss allocated to Activity 2?
a. $- 0
b. $1,800
c. $3,000
d. $4,200
e. $6,000
ANSWER: b

47. Ricardo owns interests in 3 passive activities: A, B, and C. During the current year, activity A realizes income of $8,000 while activities B and C realize losses of $16,000 and $24,000, respectively. Determine the amount of suspended loss attributable to activity C.
a. $- 0
b. $ 8,000
c. $12,800
d. $19,200
e. $24,000
ANSWER: d

48. Ling owns 3 passive investments. During the last two years, she has the following income and loss from each activity:
2014 2015
Activity 1 $(14,000) $(6,000)
Activity 2 (6,000) (1,000)
Activity 3 8,000 12,000

At the end of 2015 what is the amount of suspended loss allocated to Activity 2?
a. $1,695
b. $1,815
c. $5,185
d. $5,305
e. $7,000
ANSWER: a

49. Loren owns three passive activities that had the following results for the current year:
Passive Activity A $25,000
Passive Activity B (10,000)
Passive Activity C (40,000)

If none of the passive activities are rental real estate activities, what is the amount of suspended loss attributable to Activity C?
a. $- 0
b. $18,750
c. $20,000
d. $25,000
e. $40,000
ANSWER: c

50. Linda owns three passive activities that had the following results for the current year:
Passive Activity A $(4,500)
Passive Activity B 20,000
Passive Activity C (25,500)

If none of the passive activities are rental real estate activities, what is the amount of suspended loss attributable to Activity A?
a. $- 0
b. $ 1,500
c. $ 4,500
d. $ 8,500
e. $10,000
ANSWER: b

51. During the current year, Diane disposes of Fine Foods Limited Partnership, at a gain of $12,000. Dianes adjusted gross income from non-passive sources is $120,000. She has a suspended loss from Fine Foods of $22,000, and a loss from other passive activities of $4,500. What is the amount of Dianes adjusted gross income for the current year?
a. $95,550
b. $105,500
c. $110,000
d. $115,500
e. $120,000
ANSWER: c

52. Darien owns a passive activity that has a basis of $36,000 and a suspended loss of $22,000. If Darien dies during the year when the passive activity has a fair market value of $52,000, how will the information be presented on his tax return?
I. Darien will report an ordinary loss of $6,000.
II. Darien will report a capital gain of $16,000.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: a

53. Active participation and real estate professional are both exceptions to the general rule for passive activity losses with rental real estate.
I. A taxpayer qualifying under both exceptions is limited to a maximum annual deduction of $25,000.
II. Active participation results from owning at least a 10% interest in the activity and arranging for repairs and maintenance and collecting rents.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

54. Active participation and real estate professional are both exceptions to the general rule for passive activity losses with rental real estate.
I. One of the tests that an individual must meet to qualify as a real estate professional is that the taxpayer spends more than 50% of his/her time in real property trades or businesses.
II. A taxpayer with an AGI of $190,000 qualifying under the real estate professional exception may deduct an unlimited amount of rental real estate losses.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

55. Mark has an adjusted gross income of $154,000. Not included in his adjusted gross income is a $16,000 loss from a passive activity. Which of the following statements regarding the effect of the passive loss on his adjusted gross income is/are correct?
I. If the activity does not involve rental real estate, he can only deduct the loss as a miscellaneous itemized deduction.
II. If the activity is rental real estate and Mark is an active participant, he can deduct the $16,000 loss for adjusted gross income.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: d

56. Rose has an adjusted gross income of $130,000. Not included in her adjusted gross income is a $15,000 loss from a passive activity. Which of the following statements regarding the effect of the passive loss on his adjusted gross income is/are correct?
I. If the activity is rental real estate and Rose meets the real estate professional exception, she can deduct the $15,000 loss for adjusted gross income.
II. If the activity is rental real estate and Rose is an active participant, she can deduct $5,000 of the loss for adjusted gross income.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: a

57. Mary and Philip purchased an apartment building in January 2011, which they actively manage. During the current year, the apartment building generates a loss of $35,000. Their other income is as follows:
Salaries $80,000
Dividends and interest 8,000
Loss from limited partnership acquired in 2009 (4,000)

What is Mary and Philips adjusted gross income?
a. $59,000
b. $63,000
c. $84,000
d. $88,000
e. None of the above.
ANSWER: a

58. Judy and Larry are married and their combined salaries for the current year are $115,000. They actively participate in the rental of two houses. For the current year they have the following losses:
Income/(Loss)
Limited Partnership A $(5,000)
Limited Partnership B 8,000
Rental house X (5,000)
Rental house Y (2,000)

What is Judy and Larrys adjusted gross income?
a. $108,000
b. $111,000
c. $114,000
d. $115,000
e. $118,000
ANSWER: b

59. Sarah owns a passive activity that has a suspended loss of $18,000. The activity has a fair market value of $35,000 and her adjusted basis in the activity is $20,000.
I. If Sarah sells the activity, she is allowed to deduct the $18,000 suspended loss.
II. If Sarah gifts the activity, she is only be allowed to deduct $15,000 of the suspended loss.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

60. Norris owns a passive activity that has a suspended loss of $12,000. The activity has a fair market value of $42,000 and his adjusted basis in the activity is $27,000.
I. If Norris gifts the property, he is allowed to deduct $3,000 of the suspended loss.
II. If Norris dies, none of the suspended loss is deductible.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

61. Anna owns a passive activity that has a basis of $30,000 and a suspended loss of $7,000. Anna gifts the passive activity to her daughter Patricia when the property has a fair market value of $42,000.
I. Anna will report an ordinary loss of $7,000.
II. Patricias basis in the passive activity is $30,000.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: d

62. Which of the following events is a casualty loss?
I. Lightning damage.
II. Loss of the topsoil on a farm from a flood.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

63. Which of the following events is a casualty loss?
I. Diamonds stolen by thief, reported to police
II. Florida orange trees killed by a freeze.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

64. Marios delivery van is completely destroyed when a tree fell on it. Marios insurance company pays him $11,000 for the accident. The van cost $20,000 three years ago. Tax depreciation deductions of $6,000 have been taken to date. The Blue Book value (i.e., fair market value) of the van is $12,000 on the accident date. What is Marios casualty loss on the van?
a. $- 0
b. $ 1,000
c. $ 3,000
d. $ 8,000
e. $13,000
ANSWER: c

65. In April of the current year, Speedy Printing Companys delivery van is stolen. The van was originally purchased in 2011 for $13,000, and its fair market value at the time of the theft is $4,000. The van has a zero adjusted basis on the books of Speedy. The previous year, Speedy dropped theft insurance on the van, so it receives no compensation for the loss from its insurance company. What amount of loss can Speedy deduct?
a. $- 0
b. $ 4,000
c. $10,900
d. $12,900
e. $13,000
ANSWER: a

66. Jennifers business storage shed is damaged by a hail storm. The shed is uninsured. Its adjusted basis is $8,000. Just before the accident the shed is appraised for $10,000. In its damaged condition, the shed can be sold for $4,000. What is Jennifers loss from the storm?
a. $- 0
b. $ 4,000
c. $ 6,000
d. $ 8,000
e. $10,000
ANSWER: c

67. Gomez, a self-employed consultant, is involved in a traffic accident with his business-use automobile. The car is totally destroyed and Gomezs insurance policy reimburses him $8,000 for the fair market value of the car immediately before the accident. His basis in the car is $11,000. What is the amount of Gomezs casualty loss deduction?
a. $- 0
b. $ 2,000
c. $ 3,000
d. $ 8,000
e. $11,000
ANSWER: c

68. Fords automobile that he uses 100% for business is vandalized. The adjusted basis before the vandalism is $3,000. The fair market value of the car before the vandalism is $7,000, and the fair market value of the property after the vandalism is $2,000. Fords insurance does not cover vandalism. What is Fords loss deduction for the year?
a. $- 0
b. $1,000
c. $2,000
d. $3,000
e. $5,000
ANSWER: d

69. Which of the following losses are generally deductible?
I. Loss on the sale of corporate stock.
II. Losses incurred in carrying on a trade or business.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

70. Which of the following losses are generally deductible?
I. Loss on the sale of a personal residence.
II. Loss due to the theft of business inventory.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

71. All of the following are capital assets, except
a. Personal residence.
b. Land used for business parking lot.
c. Pickup truck used for personal transportation..
d. Corporate bonds held for investment purposes.
e. A hand-written letter by Dwight Eisenhower held in a private collection.
ANSWER: b

72. In addition to his salary, Peter realizes a $1,000 short-term capital gain and a $5,000 long-term capital loss. The net effect of the capital asset transactions on Peters adjusted gross income is
a. $-0-
b. $1,000
c. $(3,000)
d. $(4,000)
e. $(5,000)
ANSWER: c

73. During the current year, Terry has a short-term capital loss of $9,000 and a long-term capital gain of $3,000. Due to these transactions Terry reports
a. A capital loss deduction of $3,000 and a loss carryforward of $3,000
b. A capital loss deduction of $3,000 and a loss carryforward of $6,000.
c. A capital loss deduction of $9,000.
d. A capital gain of $3,000 and a loss carryforward of $9,000.
e. A capital loss deduction of $6,000
ANSWER: a

74. Which of the following is true concerning capital losses and net operating losses for corporations:

Capital loss Net operating loss
a. Carried back 5 years Carried back 2 years
b. Carried back 5 years Carried forward 20 years
c. Carried back 3 years Carried forward 20 years
d. Carried back 5 years Carried forward 5 years
e. Carried back 3 years Carried forward 5 years
ANSWER: c

75. Billingsworth Corporation has the following net capital gains and losses for 2012 through 2015. Billingsworth marginal tax rate is 34% for all years.

2012 2013 2014 2015
$8,000 $3,000 $6,500 $(9,000)

In 2014, Billingsworth Corporation earned net operating income of $30,000. What is/are the tax effect(s) of the $9,000 net capital loss in 2015?
I. Corporate taxable income is $21,000.
II. The net capital loss will provide income tax refunds totaling $3,060.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: a

76. During the current year, Schmidt Corporation has operating income of $75,000 and a net capital loss of $25,000. What is Schmidts taxable income?
a. $- 0
b. $50,000
c. $72,000
d. $75,000
e. $90,000
ANSWER: d

77. Melinda and Riley are married taxpayers. During the year, they completed a single capital asset sale in which a loss of $120,000 is realized on the sale ($15,000 amount realized, less $135,000 adjusted basis) of qualified small business stock. How much of the loss can the taxpayers deduct?
a. $3,000
b. $53,000
c. $100,000
d. $103,000
e. $120,000
ANSWER: d

78. Rosanna, a single taxpayer, owns 2,000 shares of qualifying small business stock that she purchased for $225,000. During the current year, she sells 800 of the shares for $30,000. If this is the only stock Rosanna sells during the year, what can she deduct as an ordinary and capital loss?

Ordinary loss Capital loss
a. $58,000 $- 0
b. $50,000 $3,000
c. $50,000 $10,000
d. $- 0 $3,000
e. $- 0 $60,000
ANSWER: b

79. Roscoe and Amy are married and own 12,000 shares of qualifying small business stock that they purchased for $150,000. During the current year, they sell 10,000 shares of the small business stock to an unrelated third party for $30,000. Eager to sell the remaining shares, they sell the other 2,000 shares to Amys sister for $4,000. In addition, they sell stock with a basis of $5,000 for $10,000. The stock was acquired in 2007. In 2010, Roscoe and Amy loaned her brother, Carl, $8,000 to start his business. Carl has only repaid $2,000 on his documented loan. During the year, Carl has filed for bankruptcy. The bankruptcy court liquidates all of Carls assets and Roscoe and Amy receive nothing from the liquidation.
I. Roscoe and Amy can deduct $120,000 as an ordinary loss on the small business stock.
II. Roscoe and Amy have a net short-term capital loss of $1,000.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: b

80. Aunt Bea sold some stock she purchased several years ago for $10,000 to her nephew, Andy, for $6,000.
I. If this is Aunt Beas only stock transaction, she can deduct only $3,000 of the loss.
II. If Andy sells the stock for $10,000, his taxable gain is $4,000.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: c

81. Frasier sells some stock he purchased several years ago for $10,000 to his brother, Niles, for $6,000.
I. If this is Frasiers only stock transaction, he can deduct only $3,000 of the loss.
II. If Niles sells the stock for $10,000, his taxable gain is $4,000.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: d

82. Georgia sells stock she purchased for $20,000 to her brother Billy for $12,000. Two years later, Billy sells the stock to Allie, an unrelated individual, for $22,000. What is Billys recognized gain or loss?
a. $- 0
b. $ 2,000 gain
c. $10,000 gain
d. $ 8,000 loss
e. $ 6,000 loss
ANSWER: b

83. Lisa sells some stock she purchased several years ago for $10,000 to her brother Bart for $8,000. One year later Bart sells the stock for $12,000. The tax consequences to Lisa and Bart are:

Lisa Bart
a. $2,000 loss $4,000 gain
b. No gain or loss $4,000 gain
c. No gain or loss $2,000 gain
d. $2,000 gain No gain or loss
e. $2,000 loss $2,000 gain
ANSWER: c

84. Olivia sells some stock she purchased several years ago for $9,000 to her brother Jack for $12,000. One year later Jack sells the stock for $15,000. The tax consequences to Olivia and Jack are:

Olivia Jack
a. $3,000 gain $3,000 gain
b. No gain or loss $6,000 gain
c. No gain or loss $3,000 gain
d. $3,000 gain $6,000 gain
e. No gain or loss No gain or loss
ANSWER: a

85. Sylvia owns 1,000 shares of Sidney Sails, Inc., for which she paid $18,000 several years ago. On March 15, she purchases 400 additional shares for $5,000. Sylvia sells the original 1,000 shares for $13,500 on April 1. These are her only stock transactions during the year. Sylvias capital loss deduction for the current year and her basis in the new shares are:

Capital loss Basis
a. $3,000 $5,000
b. $2,700 $6,800
c. $4,500 $5,000
d. $3,000 $6,800
e. $2,700 $5,000
ANSWER: b

86. Hamlet, a calendar year taxpayer, owns 1,000 shares of Vanity Corporation common stock, which he purchased two years ago for $4,000. Hamlet sells all of his shares on December 29, 2015, for $2,500. On January 23, 2016, he purchases 600 shares of Vanity Corporation common stock. What is the amount of Hamlets recognized loss in 2015?
a. $- 0
b. $600
c. $900
d. $1,500
e. $4,000
ANSWER: b

87. The wash sale provisions apply to which of the following?
I. Tom realizes an $8,000 loss on the June 17, 2015, sale of 650 shares of Roadrunner Corporation common stock. He replaces the 650 shares with Hawke Inc., stock on July 8, 2015.
II. Rosie realizes a $6,000 loss on the December 29, 2014, sale of 40 Billings corporate bonds. Each bond has a face value of $1,000. She replaces the Billings corporate bonds with 30 Redeemer corporate bonds, each with a face value of $1,000 on January 16, 2015. The Redeemer bonds have the same interest rate, maturity date, but a different bond rating (AAA) as the Billings bonds.

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: a

88. The wash sale provisions apply to which of the following?
I. Jim bought 500 additional shares of Alfa Gamma stock for $4,000 on December 2, 2015. Jim owned 2,500 shares after that purchase. On December 26, 2015, Jim realizes a loss of $1,500 on the sale of 250 shares of Alfa Gamma stock.
II. Calvin realizes a $8,000 loss on the December 29, 2015, sale of Sloan corporate bonds. Each bond has a face value of $1,000. He replaces the Sloan corporate bonds with the same number of Jackson corporate bonds, each with a face value of $1,000 on January 16, 2016. The Jackson bonds have a different interest rate and maturity date then the Sloan bonds but have the same bond rating (AAA).

a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
ANSWER: a

89. During the year, Daniel sells both of his personal vehicles. On January 10, he realizes a $9,000 loss on the sale of the first car. On April 5, he realizes a $1,000 gain on the sale of the second car. Assume Daniels salary for the year is $50,000, and he has no other income. What is Daniels Adjusted Gross Income?
a. $40,000
b. $41,000
c. $42,000
d. $50,000
e. $51,000
ANSWER: e

90. Samantha sells the following assets and realizes the following gains (losses) during the current year:
Home computer (personal) $(600)
Municipal bonds 6,000
Stamp collection 3,000
Carpeting from residence (2,000)
1956 Chevrolet auto 4,000

As a result of these sales, Samanthas adjusted gross income will:
a. Increase by $5,000.
b. Increase by $10,400.
c. Increase by $11,000.
d. Increase by $13,000.
e. Decrease by $ 600.
ANSWER: d

91. Willie sells the following assets and realizes the following gains (losses) during the current year:
Personal auto $(5,000)
Municipal bonds (7,000)
Stamp collection 4,000
Furniture (6,000)
1% interest in oil well (8,000)

As a result of these sales, Willies adjusted gross income will:
a. Decrease by $3,000.
b. Decrease by $4,000.
c. Decrease by $11,000.
d. Decrease by $15,000.
e. Not change.
ANSWER: a

92. During the current year, Cathy realizes
a $3,000 loss on the sale of her personal use automobile held 4 years.
a $4,000 loss on the sale of Itoham Corporation stock held 3 years for investment.
a $2,000 gain on the sale of Sterling, Inc., bonds held 7 months for an investment.

Determine the tax consequences of these events.
a. Cathy deducts a $5,000 net capital loss.
b. Cathy deducts a $3,000 net capital loss.
c. Cathy deducts a $2,000 net capital loss.
d. Cathy deducts a $1,000 net capital loss.
e. Cathy deducts a $7,000 net capital loss.
ANSWER: c

93. During the year, Shipras apartment is burglarized and her TV and stereo are taken. Her basis in the TV is $1,200 and it has a fair market value of $700. Her basis in the stereo is $400 and it has a fair market value of $600. What is Shipras theft loss deduction (before considering the annual limitation based upon AGI)?
a. $- 0
b. $900
c. $1,000
d. $1,200
e. $1,300
ANSWER: c

94. The Ottomans own a winter cabin in Durango, Colorado. They purchased the cabin in 2004 for $65,000. During the current year, a blizzard partially destroys the cabin. The fair market value of the cabin after the blizzard is $70,000. The insurance company estimates that the cost of repairing the cabin will be $40,000. The insurance company will reimburse the Ottomans for 70% of the repair cost. What can they deduct as a casualty loss if their adjusted gross income for the year is $80,000?
a. $3,900
b. $4,000
c. $8,000
d. $11,900
e. $12,000
ANSWER: a

95. Jerome owns a farm, which has three separate houses. He rents out two of the houses and lives in the other house. During the current year, a tornado goes through his property causing damage to the houses. Rental House A had a fair market value of $40,000 and an adjusted basis of $20,000, but it is not damaged by the tornado. A local real estate agent told Jerome that because of the tornado, property values in the area have declined 10%. Rental House B, which has an adjusted basis of $25,000, is worth $60,000 before the tornado and $20,000 after the tornado. Jeromes insurance company pays him $20,000 for the damage to Rental House B. Jeromes residence (which has an adjusted basis of $80,000) was worth $70,000 before it is totally destroyed by the tornado. Jeromes insurance company reimburses him $60,000 for the loss of his residence. Ignore the limitation based on Adjusted Gross Income.
I. Jerome deducts a loss of $5,000 on Rental House A.
II. Jerome deducts a loss of $35,000 on Rental House B.
III. Jeromes loss on his residence is $9,900.
IV. Jerome cannot deduct a loss on Rental House A.

a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements II and IV are correct.
e. Statements III and IV are correct.
ANSWER: e

96. If a corporation incurs a net operating loss, what would cause it to elect to carry the loss forward and forsake the carryback? Explain.
ANSWER: If the corporations future marginal tax rates are expected to be greater than its past marginal tax rates in the carryback period it should consider foregoing the carryback. However, the corporation should also consider the present value of foregoing the refund (i.e., time value of money) in the current period.

97. Tyrone is the president of JWH Manufacturing and owns 30% of its stock. JWH is organized as an S corporation. During 2015, JWH has a loss of $240,000. At the beginning of 2015, Tyrones amount at-risk in JWH is $60,000.
a. What is Tyrone deductible loss in 2015? What is Tyrones at-risk amount at the end of 2015?
b. In 2016, JWH has a taxable income of $100,000. What is the effect on Tyrones 2016 income? What is Tyrones at-risk amount at the end of 2016?
ANSWER: a. As an S corporation, the income and losses are passed through to its shareholders for taxation. In 2015, Tyrones share of the loss is $72,000 ($240,000 30%). Tyrone cannot deduct any loss in excess of his at-risk amount in JWH. Therefore, his 2014 loss deduction is limited to $60,000 (reducing his at-risk amount to zero). The remaining $12,000 of his loss is suspended until his at-risk amount increases.

b. Tyrones share of the income is $30,000 ($100,000 30%), which is included in his 2016 gross income. This increases his amount at-risk by $30,000 and he is allowed to deduct the $12,000 loss from 2015 suspended due to the at-risk rules. By deducting the loss, Tyrones at risk amount at the end of 2016 is $18,000 ($30,000 $12,000).

98. Why did Congress enact the at-risk rules?
ANSWER: To disallow the deduction of artificial losses generated by tax-shelter investments. The intent is to limit loss deductions by individuals and closely held corporations on business and investment-related activities to the amount of the taxpayers actual economic investment.

99. Ronald is exploring whether to open a franchise of Quick Tax. He plans on forming an S corporation and investing $15,000 of his own money while borrowing $45,000 from the bank to finance the purchase of the necessary computing equipment and software. The bank has proposed two financing options. Under the first option, the interest rate is only 10%, but the loan is recourse. The second option increases the interest rate to 15%, but the loan is nonrecourse.
a. Discuss the tax and non-tax aspects of the two options.
b. If Ronald incurs a $20,000 loss in the first year of operations, how much, if any, of the loss can he deduct if the loan is recourse? Nonrecourse?
ANSWER: a. From a tax perspective, if Ronald decides to finance the purchase of the equipment and software with recourse debt, he will be at-risk for $60,000. Assuming he has no income in the early years of the business, he is allowed to deduct up to $60,000 of Quick Tax losses on his personal return. If he chooses to use nonrecourse debt, he can only recognize up to $15,000 (his investment) in losses. This represents the amount he is at-risk in Quick Tax. Nonrecourse debt can only increase the amount an individual is at-risk for if the debt is secured by real estate in a real estate activity. In this case, the business is not real estate.
The non-tax aspects Ronald should consider is whether he wants to put his personal assets at risk by using a recourse loan. Although he will increase his cash flow by having a lower interest rate (15% versus 10%), this rate difference comes at a price his personal assets. On the other hand, although he preserves the amount of assets he has at-risk by using a nonrecourse loan, he increases the burden on his business to generate the necessary cash flow to make the interest payments.

b. Ronald only can deduct losses up to the amount he is at-risk for in the activity. He is considered to be at-risk only for the amount he has invested in the activity and the amount in which he is personally liable. Nonrecourse debt is considered at-risk only if the debt is secured by real estate in a real estate activity and made on reasonable commercial terms. Therefore, if Ronald uses a nonrecourse loan he is at-risk for only $15,000 (the amount he invested) and he can only deduct $15,000 in losses. The remaining $5,000 is suspended due to the at-risk limitation. If Ronald uses a recourse loan then he can deduct the full $20,000 loss because he is considered at-risk for $60,000 ($15,000 + $45,000). The amount he is at-risk for at the end of the year is $40,000 ($60,000 $20,000).

100. Discuss the difference(s) between the real estate professional exception and the active participation exception when dealing with rental properties.
ANSWER: (1) The primary difference between these two classifications involves the purpose for the classifications. If a taxpayer qualifies under the real estate professional exception the activity is considered an active trade or business of the taxpayer. Whereas, active participation is a classification that is used after a rental real estate activity is deemed subject to passive loss rules. Active participation is one of the tests for determining whether taxpayers with passive rental real estate activities can deduct up to $25,000 annually against active and/or portfolio income.

(2) The actual tests to determine the classifications are also different. To qualify as a real estate professional, the taxpayer must spend more than 50% of his/her personal service in a real property trade or business of which the taxpayer owns at least a 5% interest, the amount of time spent in the real property trade or business must be greater than 750 hours, and the taxpayer must materially participate in the rental activity (i.e., spend greater than 500 hours on the rental activity or meet the 100-hour test). To pass the active participation test, a taxpayer does not need to have regular, continuous, and material involvement in the activity, implied by the above tests, and does not need to meet any of the material participation tests. A taxpayer needs only to have significant and bona fide involvement. This is less stringent than the test to qualify as a real estate professional. It merely requires the taxpayer to make management decisions, collect rents, arrange for repairs, keep records, etc., or to hire a rental management agent to perform these services. The taxpayer must own more than a 10% interest in the rental property.

101. Classify and briefly explain the proper classification for each of the income-generating activities below. The classifications are either, active, passive, or portfolio.
a. Ford Motor Company Bond interest.
b. Commissions earned from insurance sales.
c. Sale of Microsoft common stock held as an investment.
d. Income from a limited partnership investment.
e. Rental income from an apartment building and the individual owner does not qualify as a real estate professional.
f. Gain from the sale of rental real estate and the individual owner does not qualify as a real estate professional.
ANSWER: a. Portfolio income. Derived from securities.

b. Active income. Materially involved in earning the revenue.

c. Portfolio income. The sale of the asset has the same classification as the income from the asset.

d. Passive income. Limited partnerships are passive by definition.

e. Passive income. Rents are passive unless the individual owner qualifies as a real estate professional.

f. Passive income. Rents are passive by definition, and gains (or losses) realized from the disposition of the asset are also passive, unless the individual owner qualifies as a real estate professional.

102. A taxpayer has the following income (losses) for the current year:
Active Income Portfolio Income Passive Income
$98,000 $22,000 $(30,000)

What is the taxable income (loss) of the taxpayer if:
a. The taxpayer is a publicly held corporation?
b. The taxpayer is a closely held corporation?
c. The taxpayer is an individual and the passive income is not from a rental activity?
d. The taxpayer is an individual and the passive income is the result of a rental activity for which the taxpayer qualifies as a real estate professional.
e. The taxpayer is an individual and the passive income is the result of a rental activity for which the taxpayer fails to qualify as a real estate professional but meets the active participation test?
ANSWER: a. Publicly held corporations are not subject to the passive activity loss rules. The taxpayer reports income of $90,000 ($98,000 + $22,000 $30,000).

b. A closely held corporation is allowed to deduct passive losses against the active income of the corporation, but not against portfolio income. In this case, the $30,000 passive loss can be deducted against the $98,000 of active income, leaving the corporation with a taxable income of $90,000 [$22,000 + ($98,000 $30,000)].

c. An individual cannot deduct passive losses against active or portfolio income. The individual taxpayer has taxable income of $120,000 ($98,000 + $22,000) and a suspended loss of $30,000.

d. An individual who qualifies as a real estate professional can deduct all losses from the activity against active and portfolio income. The taxable income is $90,000 ($98,000 + $22,000 $30,000).

e. An individual who is an active participant in a rental real estate activity is allowed to deduct up to $25,000 of losses from rental activities against active and portfolio income. However, because the taxpayers adjusted gross income before considering the passive loss exceeds $100,000 ($98,000 + $22,000 = $120,000), the $25,000 maximum loss is reduced to $15,000 {$25,000 [($120,000 $100,000) $.50]}. The taxable income is $105,000 ($98,000 + $22,000 $15,000) and a suspended loss of $15,000

103. Maryanne is the senior chef for Bistro 501 Restaurant. Discuss whether the following losses are affected by the passive activity rules.
a. Maryanne has a $4,500 loss from her ownership interest in a catfish-farm limited partnership. Maryanne is a limited partner.
b. Maryanne has a $7,000 loss from her ownership interest in a feeder-lamb limited partnership. Maryanne is a general partner and is responsible for day-to-day management decisions.
c. Maryanne has a $11,000 loss from her ownership of a low-income housing project.
d. Maryanne owns a rental house across the street from North Forest College and actively participates in managing the rental property. The rental property generates a loss of $5,000 for the current year.
ANSWER: a. A limited partnership interest is passive by definition. Therefore, the loss can only be used to offset passive income generated by any of Maryannes investments.

b. A general partnership interest is passive if Maryanne does not materially participate in the activities of the enterprise. In this case, Maryanne is the day-to-day decision maker. As long as she functions in this capacity over 500 hours in the current tax year, the loss is not passive. Maryanne can deduct the loss against other active and portfolio income.

c. Losses from low-income housing investments are excluded from the passive activity loss limitation rules. These losses can be deducted from active or portfolio income.

d. Rental losses are passive by definition. However, a special exception exists that allows an individual taxpayer owning at least 10% of the investment to deduct up to $25,000 in rental losses annually. If the taxpayers AGI exceeds $100,000, the maximum amount deductible is reduced by $.50 for each dollar of AGI over $100,000.

104. Erline begins investing in various activities during the current year. Unfortunately, her tax advisor fails to warn her about the passive loss rules. The results of the three passive activities she purchased for the current year are:
Income (Loss)
Passive Activity 1 $(36,000)
Passive Activity 2 22,000
Passive Activity 3 (4,000)

a. If Erlines adjusted gross income is $170,000 before considering the effect of the passive activities, what will Erlines adjusted gross income be for the current year? Fully explain the effect of the passive activity investments on her adjusted gross income.

b. Because Passive Activity 1 has been such a loser, Erline is considering selling it. However, she is concerned about the effect of the sale on her taxable income because her tax advisor told her that her basis in the activity is only $14,000 and she could sell it for $32,000. Explain the effect on her taxable income if she sells Activity 1 for $32,000.
ANSWER: a. Erlines adjusted gross income will be $170,000. Erline will include the $22,000 of income passive activity 2 in her gross income and she will deduct $22,000 of losses from passive activities 1 and 3. The $18,000 ($22,000 $36,000 $4,000) net passive loss is suspended and carried forward to the next year.

b. Erline will realize a capital gain of $18,000 ($32,000 $14,000) from the sale of passive activity 1. However, she will be allowed to deduct the $16,200 [$18,000 ($36,000 $40,000)] suspended loss on the activity. Therefore, her taxable income will only increase by $1,800 if she sells it. In addition, if she has held the passive activity 1 for more than 12 months, she will have a long-term capital gain of $18,000 and an ordinary loss of $16,200.

105. Brent is single and owns a passive activity that has a basis of $25,000 and a suspended passive loss of $8,000. He acquired the passive activity in 2010. Brents taxable income from active and portfolio income is $85,000, and he has no other capital gains or losses for the year.
a. What is the effect on Brents taxable income if he sells the passive activity for $42,000?
b. What is the effect on Brents taxable income if he sells the passive activity for $13,000?
c. What is the effect on Brents taxable income if he dies this year while the fair market value of the passive activity is $30,000?
d. What is the effect on Brents taxable income if he dies this year while the fair market value of the passive activity is $18,000?
e. What is the effect on Brents taxable income if he gives the passive activity to his brother Norm when the fair market value of the passive activity is $30,000?
ANSWER: a. Any suspended loss on a passive activity is deductible in full when an entire interest in an activity is disposed of through a sale of the activity. In this case, Brent has a capital gain of $17,000 ($42,000 $25,000) on the sale of the activity and a deduction of $8,000 for the suspended loss on the activity. This results in income of $94,000 ($85,000 +$17,000 $8,000). However, the $17,000 capital gain is taxed at either 15% or 20%. As a result, $17,000 of his $94,000 taxable income is taxed at 15% or 20%.

b. In this case, Brent has a $12,000 capital loss on the sale of the passive activity and is allowed a deduction for the $8,000 suspended loss. However, if Brent has no capital gains during the year only $3,000 of the capital loss is deducted in the year of sale and the remaining $9,000 is carried forward. As a result, Brents taxable income is $74,000 ($85,000 $3,000 $8,000).

c. A deduction is allowed for a suspended loss on a passive activity held at death, but only to the extent of the excess of any suspended loss over the unrealized gain on the passive activity. In this case, the unrealized gain is $5,000 ($30,000 $25,000) and the suspended loss is $8,000, resulting in an excess of $3,000. Therefore, Brent is allowed a deduction of $3,000. As a result, Brents taxable income is $82,000 ($85,000 $3,000).

d. A deduction is allowed for a suspended loss on a passive activity held at death, but only to the extent of the excess of any suspended loss over the unrealized gain on the passive activity. In this case, there is no unrealized gain ($18,000 $25,000 = $7,000 loss) and Brent is not allowed a suspended loss deduction. As a result, Brents taxable income is $85,000.

e. A taxpayer cannot deduct the amount of the suspended loss when a passive activity is gifted. The donee has a basis in the activity equal to the sum of the donors basis and the amount of the suspended loss. Norms basis in the activity is $33,000 ($25,000 + $8,000). Neither Brent nor Norm currently receives a deduction for the $8,000 suspended loss. This treatment prevents Norm from using the suspended loss deduction against passive income. As a result, Brents taxable income is $85,000.

106. For each of the following situations, determine whether the item is deductible, and discuss any limitations, which might be placed on the deduction.
a. Carl owns an office building that he rents out to various businesses. During the current year, rental income from the building is $95,000. Carls allowable expenses relating to the office building are $150,000.
b. Edward sells stock to an unrelated party at a $70,000 loss during the current year.
c. Lee sold furniture at a loss of $5,000 during the current year.
ANSWER: a. Carl realizes a $55,000 loss ($95,000 $150,000) from his rental activity. However, rental losses are passive losses by definition and are not deductible unless Carl meets either the real estate professional exception or active participation exception. If he is qualified real estate professional, the real estate activity is considered active and he can offset the loss against his other income. To be considered a material participant he must spend more than 500 hours managing the office building (or meet the 100-hour test), spend more than 750 hours in real property trades or businesses and spend more than 50% of his working time in real property trades or businesses of which he owns a 5% interest. If Carl does not meet the real estate professional exception, he might be able to offset up to $25,000 of the loss if he meets the active participation exception. To qualify as an active participant, Carl must own at least 10% of the property and significantly participate in the management of the property. Carl is able to deduct $25,000 of the loss if his adjusted gross income without considering the loss is $100,000 or less. If his adjusted gross income is between $100,000 and $150,000, the $25,000 is phased-out by 50 cents for every dollar of adjusted gross income in excess of $100,000 until the $25,000 is phased out at $150,000.

b. Stock is generally considered a capital asset. Therefore, the $70,000 is a capital loss. Edward must net this loss with capital gains and losses from other transactions during the current year. If a net capital loss results from the netting procedure, only $3,000 of it can be deducted in the current year. The excess is carried forward indefinitely. If Edward has no other capital asset transactions during the current year, he can deduct $3,000 of the loss and the remaining $67,000 ($70,000 $3,000) is carried forward. Alternatively, if the stock qualifies as small business stock, Edward can deduct $50,000 as an ordinary loss ($100,000 if married). The $20,000 difference ($70,000 $50,000), assuming he is a single taxpayer, is treated as a capital loss, of which $3,000 is deducted in the current year.

c. If the furniture is business-use prior to the sale, the loss is deductible against ordinary income. If the fu

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