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Exam 6: Deductions and Losses: in General

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Question 71

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In a related party transaction where realized loss is disallowed,when can the disallowed loss be used by the buyer on the subsequent sale of the property? In the case of a related party disallowed loss transaction,can the related party seller's disallowed loss be used by a taxpayer other than the related party buyer?

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The related party buyer is permitted to ...

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Question 72

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If a taxpayer cannot satisfy the three-out-of-five year presumption test associated with hobby losses,then expenses from the activity cannot be deducted in excess of the gross income from the activity.

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B) False

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Question 73

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Describe the circumstances under which a taxpayer can receive rent income from a personal residence,but does not have to report it as gross income.

Two-thirds of treble damage payments under the antitrust law are deductible.

If a vacation home is classified as primarily personal use,part of the maintenance and utility expenses can be allocated and deducted as a rental expense.

Priscella pursued a hobby of making bedspreads in her spare time.Her AGI before considering the hobby is $40,000.During the year she sold the bedspreads for $10,000.She incurred expenses as follows: Assuming that the activity is deemed a hobby,how should she report these items on her tax return?

A cash basis taxpayer who charges an expense on a bank credit card is allowed to claim a deduction currently,whereas a cash basis taxpayer who charges an expense on a department store credit card is not allowed to claim a deduction until payment is made.

During the year,Jim rented his vacation home for 200 days and lived in it for 19 days.During the remaining days,the vacation home was available for rental use.Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?

The stock of Eagle,Inc.is owned as follows: Tom sells land and a building to Eagle,Inc.for $212,000.His adjusted basis for these assets is $225,000.Calculate Tom's realized and recognized loss associated with the sale.

Terry and Jim are both involved in operating illegal businesses.Terry operates a gambling business and Jim operates a drug running business.Both businesses have gross revenues of $500,000.The businesses incur the following expenses. Which of the following statements is correct?

Susan is a sales representative for a U.S.weapons manufacturer.She makes a $100,000 "grease" payment to a U.S.government official associated with a weapons purchase by the U.S.Army.She makes a similar payment to a Saudi Arabian government official associated with a similar sale.Neither of these payments is deductible by Susan's employer.

Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother,Shirley,for $160,000.Walter reinvests the proceeds in the stock market.Shirley holds the land for one year and a day and sells it in the marketplace for $169,000.

Olive,Inc.,an accrual method taxpayer,is a corporation that is equally owned by Maurice and Alex,who are brothers.The corporation uses the accrual method of accounting and the shareholders use the cash method.To provide Olive with funds to acquire additional working capital,the shareholders each loan Olive $100,000 with a 6% interest rate.At the end of the tax year,there is unpaid accrued interest of $3,000 due to each shareholder.From a timing perspective,when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

Are there any exceptions to the rule that personal expenditures cannot be deducted?

Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2012,she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia.She acquires the South Carolina operations,but not the outlets in Georgia.As to these expenses,Iris should:

For an activity classified as a hobby,the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g.,depreciation,amortization,and depletion) . (2) Amounts deductible under other Code sections without regard to the nature of the activity,such as property taxes and home mortgage interest. (3) Amounts deductible under other Code sections if the activity had been engaged in for profit,but only if those amounts do not affect adjusted basis (e.g.,maintenance,utilities,and supplies) . If these expenses exceed the gross income from the activity and are thus limited,the sequence in which they are deductible is:

If a vacation home is classified as primarily rental use,a deduction for all of the rental expenses is allowed.

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes,but is not allowed for a cash method taxpayer.

Robin and Jeff own an unincorporated hardware store.They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardware store to $0.Based on this policy,Robin and Jeff each receive a total salary of $125,000.This is paid as follows: $8,000 per month and $29,000 on December 31.Determine the amount of the salary deduction.

In applying the $1 million limit on deducting executive compensation,what corporations are subject to the deduction limit? What executives are covered?