Exam 7: Losses-Deductions and Limitations

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. ​

Ford's 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. Ford's insurance does not cover vandalism. What is Ford's loss deduction for the year?

Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain?

"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. ​

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.

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, 2018. Jim owned 2,500 shares after that purchase. On December 26, 2018, 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, 2018, 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, 2019. The Jackson bonds have a different interest rate and maturity date then the Sloan bonds but have the same bond rating (AAA). ​

A closely held corporation cannot offset net passive losses against income of the business.

Match each statement with the correct term below. -At-risk amount

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

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. ​

Mario's delivery van is completely destroyed when a tree fell on it. Mario's 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 Mario's casualty loss on the van?

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: $\begin{array}{lc}&\text { Income (Loss) }\\\text { Passive Activity } 1 & \$(36,000) \\\text { Passive Activity } 2 & 22,000 \\\text { Passive Activity } 3 & (4,000)\end{array}$ a. If Erline's adjusted gross income is $\$ 170,000$ before considering the effect of the passive activities, what will Erline's 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 $\$ 32,000$ .

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 ​

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 corporation has a net capital loss. The significance of a net capital loss in 2018 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.

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. ​

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, Samantha's adjusted gross income will:

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 Amy's 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 Carl's 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. ​

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?

Hubert and Jared are both involved in automobile accidents, which totally destroy their automobiles this year. Hubert and Jared purchased the automobiles at the same time for the same cost, and neither of them receives any insurance reimbursement for the destruction of their automobiles. Before considering the effect of their casualties, Hubert and Jared have identical adjusted gross incomes. Although Hubert and Jared are seemingly alike in every aspect regarding the automobiles, Hubert is allowed a deduction of $2,000 for the destruction of his automobile and Jared is not allowed any deduction for his automobile. What causes this disparity of treatments between Hubert and Jared? Explain. Use examples if necessary.