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Exam 11: Investor Losses

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Question 1

Multiple Choice

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Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?

A) The similarities and differences in types of business.
B) The extent of common control.
C) The extent of common ownership.
D) The geographic location.
E) All of these.

F) B) and C)
G) B) and E)

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Question 2

Multiple Choice

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Rick, a computer consultant, owns a separate business (not real estate) in which he participates. He has one employee who works part-time in the business.

A) If Rick participates for 500 hours and the employee participates for 620 hours during the year, Rick qualifies as a material participant.
B) If Rick participates for 550 hours and the employee participates for 2,000 hours during the year, Rick qualifies as a material participant.
C) If Rick participates for 120 hours and the employee participates for 120 hours during the year, Rick does not qualify as a material participant.
D) If Rick participates for 95 hours and the employee participates for 5 hours during the year, Rick probably does not qualify as a material participant.
E) None of these applies here.

F) All of the above
G) A) and D)

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Question 3

Multiple Choice

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Ramon incurred $83,100 of interest expense related to his investments this year. His investment income included $34,500 of interest and a $37,500 net capital gain on the sale of securities. Ramon has asked you to compute the amount of his deduction for investment interest, taking into consideration any options he might have. What is the maximum amount of Ramon's investment interest expense deduction in the current year?

Sarah purchased for $100,000 a 10% interest in a business venture that is not subject to the passive activity rules. During the first year, her share of the entity's loss was $120,000. At the beginning of the second year, the entity obtained $800,000 of recourse financing. Also during the second year, Sarah withdrew cash of $20,000, and her share of the entity's loss was $25,000. Calculate the amount of loss that Sarah may claim in each of the two years and determine her at-risk amount at the end of each year.

Bob realized a long-term capital gain of $8,000. In calculating his net investment income, Bob may elect to include the gain in investment income.

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

Lindsey, an attorney, earns $125,000 from her law practice in the current year. In addition, she receives $50,000 in dividends and interest during the year. Further, she incurs a loss of $40,000 from an investment in a passive activity. What is Lindsey's AGI for the year after considering the passive investment?

Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?

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

Match the treatment for the following types of transactions. -Treatment of an installment sale of a passive activity.

Purple Corporation, a personal service corporation, earns active income of $600,000. The corporation receives $60,000 in dividends and incurs a loss of $100,000 from an investment in a passive activity acquired three years ago. What is Purple's income after considering the passive investment?

Anne sells a rental house for $300,000 (adjusted basis of $255,000). 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.

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.

Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate. He paid $30,000 for his interest. How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive activity loss rules?

Jenny spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that she owns at a resort community. She also owns a music store in another city that is operated by a full-time employee. Jenny spends 140 hours per year working at the music store. She elects not to group them together as a single activity under the "appropriate economic unit" standard.

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 being held as an investment. Income from investments [dividends (not qualified) and interest] total $18,000. Raul paid and deducted $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:

Lew owns five activities, and he elects not to group them together as a single activity under the "appropriate economic unit" standard. During the year, he participates for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, 110 hours in Activity D, and 100 hours in Activity E. Which of the following statements is correct? A) Activities A, B, C, D, and E are all significant participation activities. B) Lew is a material participant in Activities A, B, C, and D only. C) Lew is a material participant in Activities A, B, C, D, and E. D) None of these.

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

Identify from the following list the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition.