Exam 11: Investor Losses

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 these is correct.

During the current year, Ethan performs personal services as follows: 800 hours in his information technology consulting practice, 625 hours in a real estate development business, and 510 hours in a condominium leasing operation. He expects that losses will be realized from the two real estate ventures and that his consulting practice will show a profit. Ethan files a joint return with his spouse whose salary is $125,000. The income and losses from the following ventures are considered active and not subject to the passive activity loss limitations:

Match the term with the correct response. More than one response may be correct. -Significant participation activity.

Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Gray is not a personal service corporation, it may deduct $34,000 of the passive activity loss.

Match the treatment for the following types of transactions. -Treatment of a sale of a passive activity for which all of the realized gain or loss is recognized currently.

Last year, Wanda gave her daughter a passive activity (adjusted basis of $80,000; fair market value of $160,000) with suspended losses of $20,000. In the current year, her daughter realizes income of $10,000 from the activity. What are the tax effects to Wanda and her daughter?

Aram 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.

Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk. If the business incurs a loss of $80,000 from operations, Stuart will be allowed the full amount as a deduction.

Jennifer gave her interest in a passive activity (fair market value of $75,000 and basis of $60,000) to Harrison. Associated with the interest is a suspended passive activity loss of $8,000. Upon making the gift, the suspended passive activity loss is not deductible to Jennifer, but it will benefit Harrison.

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

In 2019, Joanne invested $90,000 for a 20% interest in a limited liability company (LLC) in which she is a material participant. The LLC reported losses of $340,000 in 2019 and $180,000 in 2020. Joanne's share of the LLC's losses was $68,000 in 2019 and $36,000 in 2020. How much of these losses can Joanne deduct?

Chen incurred $58,500 of interest expense this year related to his investments. His investment income includes $15,000 of interest, $9,000 of qualified dividends, and a $22,500 net capital gain on the sale of securities. The Maximum amount of Chen's investment interest expense deduction for the year is:

Match the treatment for the following types of transactions. -Treatment of a disposition of a passive activity at death.

Wolf Corporation has active income of $55,000 and a passive activity loss of $33,000 in the current year. Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

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.

Sandra acquired a passive activity three years ago. Until last year, the activity was profitable and her at-risk amount was $300,000. Last year, the activity produced a loss of $100,000, and in the current year, the loss is $50,000. Assuming Sandra has received no passive activity income in the current or prior years, her suspended passive activity loss from the activity is:

Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year. His current loss from the activity is $80,000. Vic had no passive activity income during the year. At the end of the current year:

Tomas participates for 300 hours in Activity A and 250 hours in Activity B, both of which are nonrental businesses. Both activities are active.

Hugh has four passive activities that generate the following income and losses in the current year. Activity Gain (Loss) A (\ 60,000) B (20,000) C (10,000) D Total How much of the $80,000 net passive activity loss can Hugh deduct this year? Calculate the suspended losses (by activity).

Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year. In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago. Consider the following two statements: (1) Green's current deduction for passive activity losses is $50,000 if it is a closely held C Corporation that is not a personal service corporation. (2) Green's current deduction for passive activity losses is $0 if it is a personal service corporation. Which of the following answers is correct?