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Exam 11: Investor Losses

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Question 1

True/False

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If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort,any loss from that activity is treated as an active loss that can offset active income.

A) True
B) False

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Question 2

Multiple Choice

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Paula owns four separate activities.She elects not to group them together as a single activity under the "appropriate economic unit" standard.Paula participates for 130 hours in Activity A,115 hours in Activity B,260 hours in Activity C,and 100 hours in Activity D.She has one employee,who works 125 hours in Activity D.Which of the following statements is correct?

A) Activities A,B,C,and D are all significant participation activities.
B) Paula is a material participant with respect to Activities A,B,C,and D.
C) Paula is not a material participant with respect to Activities A,B,C,and D.
D) Losses from all of the activities can be used to offset Paula's active income.
E) None of the above.

F) A) and B)
G) B) and C)

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E

Question 3

Essay

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Anne sells a rental house for $100,000 (adjusted basis of $55,000).During her ownership,$60,000 of losses have been suspended under the passive activity loss rules.Determine the tax treatment to Anne on the disposition of the property.

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk.If the business incurs a loss from operations during the year and her share of the loss is $32,000,this loss will be fully deductible.

Chris receives a gift of a passive activity from his father whose basis was $60,000.Suspended losses related to the activity are $18,000.Chris will be allowed to offset the $18,000 suspended losses against future passive activity income.

Raul is married and files a joint tax return.His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land.Income from investments [dividends (not qualified) and interest] total $18,000.Raul paid $5,000 of real estate taxes on the unimproved land.He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land.Raul's maximum investment interest deduction for the year is:

Jack owns a 10% interest in a partnership (not real estate)in which his at-risk amount is $42,000 at the beginning of the year.During the year,the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations.Jack's at-risk amount at the end of the year is $44,000.

Match the term with the correct response. More than one response may be correct. a.Taxpayer devotes time aggregating more than 500 hours in all significant participation activities during the year. b.Participates in making management decisions in a significant and bonafide sense. c.One in which the individual's participation equals more than 100 hours during the year. d.Taxpayer devotes time in the activity which constitutes substantially all of the participation in the activity of all individuals. e.Both options a. and d. are correct. f.No correct choice is given. -At-risk amount.

Ned,a college professor,owns a separate business (not real estate) in which he participates in the current year.He has one employee who works part-time in the business.

Match the term with the correct response. More than one response may be correct. a.Taxpayer devotes time aggregating more than 500 hours in all significant participation activities during the year. b.Participates in making management decisions in a significant and bonafide sense. c.One in which the individual's participation equals more than 100 hours during the year. d.Taxpayer devotes time in the activity which constitutes substantially all of the participation in the activity of all individuals. e.Both options a. and d. are correct. f.No correct choice is given. -Significant participation activity.

Linda owns investments that produce portfolio income and Activity A that produces losses.From a tax perspective,Linda will be better off if Activity A is not passive.

Tom participates for 100 hours in Activity A and 450 hours in Activity B,both of which are nonrental businesses.Both activities are active.

Matt has three passive activities and has at-risk amounts in excess of $100,000 for each.During the year,the activities produced the following income (losses) . Activity A ($60,000) Activity B (40,000) Activity C 75,000 Net passive activity loss ($25,000) Matt's suspended losses are as follows:

In the current year,Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner.If she is an active participant and if her modified AGI is $100,000,she can deduct $25,000 of the loss.

Charles owns a business with two separate departments.Department A produces $100,000 of income and Department B incurs a $60,000 loss.Charles participates for 550 hours in Department A and 100 hours in Department B.He has full-time employees in both departments.

Lloyd,a life insurance salesman,earns a $400,000 salary in the current year.As he works only 30 hours per week in this job,he has time to participate in several other businesses.He owns an ice cream parlor and a car repair shop in Tampa.He also owns an ice cream parlor and a car repair shop in Portland and a car repair shop in St.Louis.A preliminary analysis on December 1 of the current year shows projected income and losses for the various businesses as follows: ​ Income (Loss) Tampa ice cream parlor (95 hours participation) $56,000 Tampa car repair shop (140 hours participation) (89,000) Portland ice cream parlor (90 hours participation) 34,000 Portland car repair shop (170 hours participation) (41,000) St.Louis car repair shop (180 hours participation) (15,000) ​ Lloyd has full-time employees at each of the five businesses listed above.Review all possible groupings for Lloyd's activities.Which grouping method and other strategies should Lloyd consider that will provide the greatest tax advantage?

Caroyl made a gift to Tim of a passive activity (adjusted basis of $50,000,suspended losses of $20,000,and a fair market value of $80,000) .No gift tax resulted from the transfer.

Judy owns a 20% interest in a partnership (not real estate)in which her at-risk amount was $35,000 at the beginning of the year.The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year.Her at-risk amount at the end of the year is $43,000.

Mary Jane participates for 100 hours during the year in an activity she owns.She has no employees and is the only participant in the activity.The activity is a significant participation activity.

Tess owns a building in which she rents apartments to tenants and operates a restaurant.Which of the following statements is incorrect?