Question 1

Identify how the passive loss rules broadly classify various types of income and losses.Provide examples of each category.

Accepted Answer

The passive loss rules require income an

Question 2

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:   Which of the following answers is correct?

Accepted Answer

A) Only statement 1. 
B) Only statement 2. 
C) Both statements 1 and 2. 
D) Neither statement 1 or 2. 
E) None of the above. 
A) Only statement 1. 
B) Only statement 2. 
C) Both statements 1 and 2. 
D) Neither statement 1 or 2. 
E) None of the above.

Question 3

From January through November, Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest.The partnership has four full-time employees.During December, Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards.Vern qualifies as a material participant.

Accepted Answer

A) True 
 B)False

Question 4

In the current year, Kenny has a $35,000 loss from a real estate rental activity.Kenny provides 1,000 hours of service to that activity, which is more than half of his working hours for the year.Kenny can deduct the $35,000 loss.

Accepted Answer

A) True 
 B)False

Question 5

Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E.

Accepted Answer

A)  All five of Dena's activities are significant participation activities. 
B)  Dena is a material participant with respect to all five activities. 
C)  Dena is not a material participant in any of the activities. 
D)  Dena is a material participant with respect to Activities B, C, D, and E. 
E)  None of the above. 
A)  All five of Dena's activities are significant participation activities. 
B)  Dena is a material participant with respect to all five activities. 
C)  Dena is not a material participant in any of the activities. 
D)  Dena is a material participant with respect to Activities B, C, D, and E. 
E)  None of the above.

Question 6

Consider the following three statements:   In which of the three cases above could the rental activity automatically be considered a passive activity?

Accepted Answer

A) Case 1 only. 
B) Case 2 only. 
C) Case 3 only. 
D) Cases 1, 2, and 3. 
E) None of the above. 
A) Case 1 only. 
B) Case 2 only. 
C) Case 3 only. 
D) Cases 1, 2, and 3. 
E) None of the above.

Question 7

Joyce, an attorney, earns $100,000 from her law practice in the current year.In addition, she receives $35,000 in dividends and interest during the year.Further, she incurs a loss of $35,000 from an investment in a passive activity.What is Joyce's AGI for the year after considering the passive investment?

Accepted Answer

Joyce cannot deduct the passiv

Question 8

Samantha sells a passive activity (adjusted basis of $50,000) for $90,000.Suspended losses attributable to this property total $30,000.The realized gain and the taxable gain are:

Accepted Answer

A) $40,000 realized gain; $70,000 taxable gain. 
B) $10,000 realized gain; $10,000 taxable gain. 
C) $40,000 realized gain; $0 taxable gain. 
D) $40,000 realized gain; $10,000 taxable gain. 
E) None of the above. 
A) $40,000 realized gain; $70,000 taxable gain. 
B) $10,000 realized gain; $10,000 taxable gain. 
C) $40,000 realized gain; $0 taxable gain. 
D) $40,000 realized gain; $10,000 taxable gain. 
E) None of the above.

Question 9

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2011.His loss from the activity in 2011 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive income from the activity in 2012.Under the passive loss rules, Art's suspended loss at the end of 2012 is:

Accepted Answer

A) $15,000. 
B) $20,000. 
C) $45,000. 
D) $60,000. 
E) None of the above. 
A) $15,000. 
B) $20,000. 
C) $45,000. 
D) $60,000. 
E) None of the above.

Question 10

Green, Inc., a closely held personal service corporation, has the following transactions in the current year: $100,000 of passive losses, $80,000 of active business income, and $20,000 of portfolio income.How much of the passive loss may Green use to offset other types of income this year?

Accepted Answer

The passive loss limitations apply to pe

Question 11

Joyce owns an activity (not real estate) in which she participates for 100 hours a year; her husband participates for 450 hours.Joyce qualifies as a material participant.

Accepted Answer

A) True 
 B)False

Question 12

Lucy dies owning a passive activity with an adjusted basis of $90,000.Its fair market value at that date is $145,000.Suspended losses relating to the property were $75,000.Which of the following statements is true?

Accepted Answer

A) The heir's adjusted basis is $145,000, and Lucy's final deduction is $20,000. 
B) The heir's adjusted basis is $145,000, and Lucy's final deduction is $75,000. 
C) The heir's adjusted basis is $90,000, and Lucy's final deduction is $75,000. 
D) The heir's adjusted basis is $220,000, and Lucy has no final deduction. 
E) None of the above. 
A) The heir's adjusted basis is $145,000, and Lucy's final deduction is $20,000. 
B) The heir's adjusted basis is $145,000, and Lucy's final deduction is $75,000. 
C) The heir's adjusted basis is $90,000, and Lucy's final deduction is $75,000. 
D) The heir's adjusted basis is $220,000, and Lucy has no final deduction. 
E) None of the above.

Question 13

Alex has three passive activities with at-risk amounts in excess of $100,000 for each.During the year, the activities produced the following income (losses).   Alex's suspended losses are as follows:

Accepted Answer

A)  $75,000 is allocated to C; $0 to A and B. 
B)  $37,500 is allocated to A; $37,500 to B. 
C)  $56,250 is allocated to A; $18,750 to B. 
D)  $25,000 is allocated to A, B, and C. 
E)  None of the above. 
A)  $75,000 is allocated to C; $0 to A and B. 
B)  $37,500 is allocated to A; $37,500 to B. 
C)  $56,250 is allocated to A; $18,750 to B. 
D)  $25,000 is allocated to A, B, and C. 
E)  None of the above.

Question 14

Coyote Corporation has active income of $45,000 and a passive loss of $23,000 in the current year.Coyote cannot deduct the $23,000 loss if it is a personal service corporation.

Accepted Answer

A) True 
 B)False

Question 15

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing.Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

Accepted Answer

A) True 
 B)False

Question 16

David earned investment income of $20,000, incurred investment interest expense of $12,000, and other investment expenses of $9,000 during the current year.David can deduct $12,000 of investment interest for this year.

Accepted Answer

A) True 
 B)False

Question 17

Jed spends 32 hours a week, 50 weeks a year, operating a DVD rental store that he owns.He also owns a music store in another city that is operated by a full-time employee.He elects not to group them together as a single activity under the "appropriate economic unit" standard.Jed spends 40 hours per year working at the music store.

Accepted Answer

A) Neither store is a passive activity. 
B) Both stores are passive activities. 
C) Only the DVD rental store is a passive activity. 
D) Only the music store is a passive activity. 
E) None of the above. 
A) Neither store is a passive activity. 
B) Both stores are passive activities. 
C) Only the DVD rental store is a passive activity. 
D) Only the music store is a passive activity. 
E) None of the above.

Question 18

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.

Accepted Answer

A) If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant. 
B) If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant. 
C) If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant. 
D) If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant. 
E) None of the above. 
A) If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant. 
B) If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant. 
C) If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant. 
D) If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant. 
E) None of the above.

Question 19

Marcia borrowed $110,000 to acquire a parcel of land to be held for investment purposes and paid interest of $9,000 on the loan. Other items related to Marcia's investments include the following:
   Marcia is unmarried, has AGI of $65,000, and elects to itemize her deductions.She has no miscellaneous itemized deductions other than the investment counsel fees.

Accepted Answer

The answer of Marcia borrowed $110,000 to acquire a parcel...

Question 20

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

Accepted Answer

A) True 
 B)False

Exam 11: Investor Losses

Identify how the passive loss rules broadly classify various types of income and losses.Provide examples of each category.

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: Which of the following answers is correct?

In the current year, Kenny has a $35,000 loss from a real estate rental activity.Kenny provides 1,000 hours of service to that activity, which is more than half of his working hours for the year.Kenny can deduct the $35,000 loss.

Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E.

Consider the following three statements: In which of the three cases above could the rental activity automatically be considered a passive activity?

Samantha sells a passive activity (adjusted basis of $50,000) for $90,000.Suspended losses attributable to this property total $30,000.The realized gain and the taxable gain are:

Green, Inc., a closely held personal service corporation, has the following transactions in the current year: $100,000 of passive losses, $80,000 of active business income, and $20,000 of portfolio income.How much of the passive loss may Green use to offset other types of income this year?

Joyce owns an activity (not real estate) in which she participates for 100 hours a year; her husband participates for 450 hours.Joyce qualifies as a material participant.

Lucy dies owning a passive activity with an adjusted basis of $90,000.Its fair market value at that date is $145,000.Suspended losses relating to the property were $75,000.Which of the following statements is true?

Alex has three passive activities with at-risk amounts in excess of $100,000 for each.During the year, the activities produced the following income (losses). Alex's suspended losses are as follows:

Coyote Corporation has active income of $45,000 and a passive loss of $23,000 in the current year.Coyote cannot deduct the $23,000 loss if it is a personal service corporation.

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing.Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

David earned investment income of $20,000, incurred investment interest expense of $12,000, and other investment expenses of $9,000 during the current year.David can deduct $12,000 of investment interest for this year.

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.

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

An Introduction to Taxation and Understanding the Federal Tax Law

Working With the Tax Law

Computing the Tax

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: in General

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Tax Credits and Payments

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 2

Property Transactions: Capital Gains and Losses, 1231, Recapture Provisions

Alternative Minimum Tax

Accounting Periods and Methods

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Distributions Not in Complete Liquidation

Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

Partnerships

S: Corporations

Exempt Entities

Multistate Corporate Taxation

Taxation of International Transactions

Tax Practice and Ethics

Income Taxation of Trusts and Estates

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