CHAPTER 11--INVESTOR LOSSES

1. Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.
True False

2. Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year. During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations. Jack’s at-risk amount at the end of the year is $44,000.
True False

3. In the current year, Don has a $55,000 loss from a business he owns. His at-risk amount at the end of the year, prior to considering the current year loss, is $36,000. He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business.
True False

4. Judy 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.
True False

5. 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.
True False

6. Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible.
True False

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

8. Jackson Company 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 Jackson is a personal service corporation, it may deduct $34,000 of the passive loss.
True False

9. Oriole Corporation has active income of $45,000 and a passive loss of $23,000 in the current year. Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation.
True False

10. 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 loss.
True False

11. Wolf Corporation has active income of $55,000 and a passive 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.
True False

12. Linda owns investments that produce portfolio income and Activity A that produces losses. From a tax perspective, Linda will be better off if Activity A is not passive.
True False

13. Nathan owns Activity A, which produces income, and Activity B, which produces passive losses. From a tax planning perspective, Nathan will be better off if Activity A is passive.
True False

14. A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.
True False

15. Dick participates in an activity for 90 hours during the year. He has no employees and there are no other participants. Dick is a material participant.
True False

16. Mary Jane participates for 100 hours during the year in an activity she owns. She has no employees and is the only participant in the activity. The activity is a significant participation activity.
True False

17. A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.
True False

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

19. Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active.
True False

20. 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.
True False

21. 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.
True False

22. When determining whether an individual is a material participant, participation by an owner’s spouse generally counts.
True False

23. If an owner participates for more than 500 hours in a DVD rental activity, any loss from that activity is treated as an active loss that can offset active income.
True False

24. Bruce owns a small apartment building that produces a $25,000 loss during the year. His AGI before considering the rental loss is $85,000. Bruce must be a material participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception.
True False

25. Wayne owns a small apartment building that produces a $45,000 loss during the year. His AGI before considering the rental loss is $85,000. Because Wayne is an active participant with respect to the rental activity, he may deduct the $45,000 loss.
True False

26. Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.
True False

27. In the current year, Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner. If she is an active participant and if her modified AGI is $100,000, she can deduct $25,000 of the loss.
True False

28. Individuals can deduct from active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.
True False

29. Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.
True False

30. Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year. He has AGI of $150,000 from an active business. He may deduct $25,000 of the loss.
True False

31. Lucy owns and actively participates in the operations of an apartment complex that produces a $50,000 loss during the year. Her modified AGI is $125,000 from an active business. Disregarding any at-risk amount limitation, she may deduct $25,000 of the loss, and the remaining $25,000 is a suspended passive loss.
True False

32. Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000. All of the $80,000 passive loss can be deducted on Kim’s final income tax return.
True False

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

34. Eric makes an installment sale of a passive activity having suspended losses of $40,000. He collects 25% of the sales price in the current year, and will collect 25% in each of the next three years. Eric can deduct $10,000 of the passive loss this year.
True False

35. Gail exchanges passive Activity A, which has suspended losses of $15,000, for passive Activity B in a nontaxable exchange. The new owner of passive Activity A can offset the $15,000 suspended losses against passive income in the future.
True False

36. 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.
True False

37. Investment income can include gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business; income from a passive activity; and income from a real estate activity in which the taxpayer actively participates.
True False

38. 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.
True False

39. Harry earned investment income of $18,500, incurred investment interest expense of $15,500, and other investment expenses of $9,000 during the current year. Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.
True False

40. In 2013, Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant. The partnership incurs a loss with $100,000 being Arnold’s share. Which of the following statements is incorrect?
A. Since Arnold has only $80,000 of capital at risk, he cannot deduct any more than this amount against his other income.
B. Arnold’s nondeductible loss of $20,000 can be carried over and used in future years (subject to the at-risk provisions).
C. If Arnold has taxable income of $40,000 from the partnership in 2014 and there are no other transactions that affect his at-risk amount, he can use all of the $20,000 loss carried over from 2013.
D. Arnold’s $100,000 loss is nondeductible in 2013 and 2014 under the passive loss provisions.
E. All of the statements are correct.

41. Last year, Ted invested $100,000 for a 50% interest in a partnership in which he was a material participant. The partnership incurred a loss, and Ted’s share was $150,000. Which of the following statements is incorrect?
A. Ted’s nondeductible loss of $50,000 can be carried over and used in the future (subject to the at-risk provisions).
B. If Ted has taxable income of $50,000 from the partnership in the current year and no other transactions that affect his at-risk amount, he can use all of the $50,000 loss carried over.
C. Since Ted has only $100,000 of capital at risk, he cannot deduct more than $100,000 against his other income.
D. None of the above is incorrect.

42. In 2013, 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 2013 and $180,000 in 2014. Joanne’s share of the LLC’s losses was $68,000 in 2013 and $36,000 in 2014. How much of these losses can Joanne deduct?
A. $68,000 in 2013; $36,000 in 2014.
B. $68,000 in 2013; $22,000 in 2014.
C. $0 in 2013; $0 in 2014.
D. $68,000 in 2013; $0 in 2014.
E. None of the above.

43. In 2013, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity. The partnership reported losses of $200,000 in 2013 and $100,000 in 2014, Kipp’s share being $60,000 in 2013 and $30,000 in 2014. How much of the losses from the partnership can Kipp deduct assuming he owns no other investments and does not participate in the partnership’s operations?
A. $0 in 2013; $30,000 in 2014.
B. $60,000 in 2013; $30,000 in 2014.
C. $60,000 in 2013; $5,000 in 2014.
D. $60,000 in 2013; $0 in 2014.
E. None of the above.

44. Josh has investments in two passive activities. Activity A (acquired three years ago) produces income of $30,000 this year, while Activity B (acquired two years ago) produces a loss of $50,000. What is the amount of Josh’s suspended loss for the year?
A. $0.
B. $18,000.
C. $20,000.
D. $50,000.
E. None of the above.

45. Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carl’s AGI for the current year after considering the passive investment?
A. $195,000.
B. $200,000.
C. $240,000.
D. $245,000.
E. None of the above.

46. Nell sells a passive activity with an adjusted basis of $45,000 for $105,000. Suspended losses attributable to this property total $45,000. The total gain and the taxable gain are:
A. $60,000 total gain; $105,000 taxable gain.
B. $10,000 total gain; $15,000 taxable gain.
C. $60,000 total gain; $0 taxable gain.
D. $60,000 total gain; $15,000 taxable gain.
E. None of the above.

47. Matt has three passive activities and has at-risk amounts in excess of $100,000 for each. During the year, the activities produced the following income (losses).

Activity A	($60,000)
Activity B	(40,000)
Activity C	75,000
Net passive loss	($25,000)

Matt’s suspended losses are as follows:
A. $25,000 is allocated to C; $0 to A and B.
B. $12,500 is allocated to A; $12,500 to B.
C. $15,000 is allocated to A; $10,000 to B.
D. $8,333 is allocated to A, B, and C.
E. None of the above.

48. 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 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 losses is $0 if it is a personal service corporation.

Which of the following answers is correct?
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.

49. White Corporation, a closely held personal service corporation, has $150,000 of passive losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive loss can White Corporation deduct?
A. $0.
B. $30,000.
C. $120,000.
D. $150,000.
E. None of the above.

50. Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments.
A. If Charles elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income.
B. Charles may not treat Department A and Department B as separate activities because they are parts of one business.
C. If Charles elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income.
D. If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income.
E. None of the above.

51. Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away.
A. All four businesses can be treated as a single activity if Tara elects to do so.
B. Only the shoe store and bookstore can be treated as a single activity, the restaurant must be treated as a separate activity, and the jewelry store must be treated as a separate activity.
C. The shoe store, bookstore, and restaurant can be treated as a single activity, and the jewelry store must be treated as a separate activity.
D. All four businesses must be treated as separate activities.
E. None of the above.

52. 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 the above.

53. Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?
A. The interdependencies between the activities.
B. The extent of common control.
C. The extent of common ownership.
D. The geographical location.
E. All of the above are relevant factors.

54. Tess owns a building in which she rents apartments to tenants and operates a restaurant. Which of the following statements is incorrect?
A. If 60% of Tess’s gross income is from apartment rentals and 40% is from the restaurant, the rental operation and the restaurant business must be treated as separate activities.
B. If 95% of Tess’s gross income is from apartment rentals and 5% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is a rental activity.
C. If 5% of Tess’s gross income is from apartment rentals and 95% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is not a rental activity.
D. If 98% of Tess’s gross income is from apartment rentals and 2% is from the restaurant, the rental operation and the restaurant business must be treated as a single activity that is not a rental activity.
E. None of the above.

55. 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 the above.

56. 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.
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.

57. Ahmad owns four activities. He participated for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. Which of the following statements is correct?
A. Activities A, B, C, and D are all significant participation activities.
B. Activities A, B, and C are significant participation activities.
C. Ahmad is a material participant with respect to Activities A, B, and C.
D. Ahmad is a material participant with respect to Activities A, B, C, and D.
E. None of the above.

58. 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 the above.

59. 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 the above.

60. Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for the last 20 years. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. However, she continues to be a material participant in a retail store in which she is a 50% partner. The restaurant operations produce a loss for the current year, and Maria’s share of the loss is $80,000. Her share of the income from the retail store is $150,000. She does not own interests in any other activities.
A. Maria cannot deduct the $80,000 loss from the restaurant because she is not a material participant.
B. Maria can offset the $80,000 loss against the $150,000 of income from the retail store.
C. Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years.
D. Assuming Maria continues to hold the interest in the restaurant, she will always treat the losses as active.
E. None of the above.

61. Leigh, who owns a 50% interest in a sporting goods store, was a material participant in the activity for the last fifteen years. She retired from the sporting goods store at the end of last year and will not participate in the activity in the future. However, she continues to be a material participant in an office supply store in which she is a 50% partner. The operations of the sporting goods store resulted in a loss for the current year and Leigh’s share of the loss is $40,000. Leigh’s share of the income from the office supply store is $75,000. She does not own interests in any other activities.
A. Leigh cannot deduct the $40,000 loss from the sporting goods store because she is not a material participant.
B. Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store.
C. Leigh will not be able to deduct any losses from the sporting goods store until future years.
D. Leigh will not be able to deduct any losses from the sporting goods store until she has been retired for at least four years.
E. None of the above.

62. 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.
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.

63. Jenny spends 32 hours a week, 50 weeks a year, operating a DVD rental store that she owns. 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.
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.

64. Skeeter invests in vacant land for the purpose of realizing a profit on its appreciation. He leases the land during the period he holds it. The unadjusted basis of the property is $75,000 and its fair market value is $105,000. The lease payments are $1,200 per year.
A. The leasing activity will be treated as a rental activity and will be treated as a passive activity regardless of how many hours Skeeter participates.
B. The leasing activity will be treated as a rental activity and will not be treated as a passive activity if Skeeter qualifies as a real estate professional.
C. The leasing activity will not be treated as a rental activity.
D. The leasing activity will be treated as a rental activity and will not be treated as a passive activity if Skeeter devotes more than 500 hours to the activity.
E. None of the above.

65. Josh has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Josh’s at-risk amounts in Activities A and B are $10,000 and $100,000, respectively. What is the amount of Josh’s suspended passive loss with respect to these activities at the end of the current year?
A. $0.
B. $36,000.
C. $40,000.
D. $100,000.
E. None of the above.

66. 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 income in the current or prior years, her suspended passive loss from the activity is:
A. $90,000 from last year and $50,000 from the current year.
B. $100,000 from last year and $50,000 from the current year.
C. $0 from last year and $0 from the current year.
D. $50,000 from the current year.
E. None of the above.

67. Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Rita’s share is $50,000. How is her loss characterized?
A. $40,000 is suspended under the passive loss rules and $10,000 is suspended under the at-risk rules.
B. $40,000 is suspended under the at-risk rules and $10,000 is suspended under the passive loss rules.
C. $50,000 is suspended under the passive loss rules.
D. $50,000 is suspended under the at-risk rules.
E. None of the above.

68. Art’s at-risk amount in a passive activity was $60,000 at the beginning of 2012. His loss from the activity in 2012 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive income from the activity in 2013. Under the passive loss rules, Art’s suspended loss at the end of 2013 is:
A. $15,000.
B. $20,000.
C. $45,000.
D. $60,000.
E. None of the above.

69. 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:
A. Vic has an at-risk amount in the activity of $120,000 and a suspended passive loss of $80,000.
B. Vic has an at-risk amount in the activity of $200,000 and a suspended passive loss of $80,000.
C. Vic has an at-risk amount in the activity of $120,000 and no suspended passive loss.
D. Vic has an at-risk amount in the activity of $200,000 and no suspended passive loss.
E. None of the above.

70. Wes’s at-risk amount in a passive activity is $25,000 at the beginning of the current year. His current loss from the activity is $35,000 and he has no passive activity income. At the end of the current year, which of the following statements is incorrect?
A. Wes has a loss of $25,000 suspended under the passive loss rules.
B. Wes has an at-risk amount in the activity of $0.
C. Wes has a loss of $10,000 suspended under the at-risk rules.
D. Wes has a loss of $35,000 suspended under the passive loss rules.
E. None of the above is incorrect.

71. Jon owns an apartment building in which he is a material participant and a computer consulting business. Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business.
A. The computer consulting business is a passive activity but the apartment building is not.
B. The apartment building is a passive activity but the computer consulting business is not.
C. Both the apartment building and the computer consulting business are passive activities.
D. Neither the apartment building nor the computer consulting business is a passive activity.
E. None of the above.

72. Consider the following three statements:

(1)	Tad invests in vacant land for the purpose of realizing a profit on its appreciation. He leases the land during the period he holds it. The unadjusted basis of the property is $25,000 and its fair market value is $35,000. The lease payments are $400 per year.
(2)	A farmer owns land with an unadjusted basis of $25,000 and a fair market value of $35,000. He used it for farming purposes in the two prior years. In the current year, he leases the land to another farmer for $400.
(3)	At City Hospital, each inpatient is provided a private room while medical care is provided.

In which of the three cases above could the rental activity automatically be considered a passive activity?
A. Case 1 only.
B. Case 2 only.
C. Case 3 only.
D. Cases 1, 2, and 3.
E. None of the above.

73. Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive loss from a real estate rental activity in which he actively participates. His modified adjusted gross income is $95,000. Of the $27,000 loss, how much is deductible?
A. $0.
B. $10,000.
C. $25,000.
D. $27,000.
E. None of the above.

74. Josie, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a $26,000 passive loss from a real estate rental activity in which she actively participates. If her modified adjusted gross income is $155,000, how much of the $26,000 loss is deductible?
A. $0.
B. $10,000.
C. $25,000.
D. $26,000.
E. None of the above.

75. Kate dies owning a passive activity with an adjusted basis of $100,000. Its fair market value at that date is $130,000. Suspended losses relating to the property were $45,000.
A. The heir’s adjusted basis is $130,000, and Kate’s final deduction is $15,000.
B. The heir’s adjusted basis is $130,000, and Kate’s final deduction is $45,000.
C. The heir’s adjusted basis is $100,000, and Kate’s final deduction is $45,000.
D. The heir’s adjusted basis is $175,000, and Kate has no final deduction.
E. None of the above.

76. Caroyl made a gift to Tim of a passive activity (adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000). No gift tax resulted from the transfer.
A. Tim’s adjusted basis is $80,000, and Tim can deduct the $20,000 of suspended losses in the future.
B. Tim’s adjusted basis is $80,000.
C. Tim’s adjusted basis is $50,000, and the suspended losses are lost.
D. Tim’s adjusted basis is $50,000, and Tim can deduct the $20,000 of suspended losses in the future.
E. None of the above.

77. Identify from the list below 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.
A. Disposition of a passive activity by gift.
B. Nontaxable exchange of a passive activity.
C. Disposition of a passive activity at death.
D. Installment sale of a passive activity.
E. None of the above.

78. 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. Income from investments [dividends (not qualified) and interest] total $18,000 and miscellaneous itemized deductions (after adjustment for the 2%-of-AGI floor) amount to $2,800. In addition to the $1,400 of investment expenses included in miscellaneous itemized deductions, Raul paid $3,600 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:
A. $95,000.
B. $18,000.
C. $17,500.
D. $13,000.
E. None of the above.

79. Judy incurred $58,500 of interest expense this year related to her investments. Her 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 Judy’s investment interest expense deduction for the year is:
A. $15,000.
B. $24,000.
C. $37,500.
D. $46,500.
E. None of the above.

80. Match the term with the correct response. More than one response may be correct.

1. Active participation.	One in which the individual’s participation equals more than 100 hours during the year.	____
2. At-risk amount.	No correct choice is given.	____
3. Significant participation activity.	Taxpayer devotes time aggregating more than 500 hours in all significant participation activities during the year.	____
4. Extraordinary personal services.	The use of property is incidental to the receipt of services.	____
5. Material participation.	Participates in making management decisions in a significant and bonafide sense.	____

81. Match the treatment for the following types of transactions.

1. Treatment of an installment sale of a passive activity.	The suspended losses are added to the basis of the property.	____
2. Treatment of a disposition of a passive activity at death.	Suspended losses are allowed to the taxpayer to the extent they exceed the amount, if any, of the step-up in basis allowed.	____
3. Treatment of a sale of a passive activity where all of the realized gain or loss is recognized currently.	The losses are allowed in the years in which gain is recognized.	____
4. Treatment of a disposition of a passive activity by gift.	The taxpayer keeps the suspended losses.	____
5. Treatment of a nontaxable exchange of a passive activity.	Any suspended losses may be used in the current year.	____
6. Treatment of suspended credits when passive activity is sold at a loss.	No correct choice is given.	____

82. 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. 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.

83. In 2013, Emily invests $120,000 in a limited partnership that is not a passive activity. During 2013, her share of the partnership loss is $90,000. In 2014, her share of the partnership loss is $50,000. How much can Emily deduct in 2013 and 2014?

84. In 2012, Kelly earns a salary of $200,000 and invests $40,000 for a 20% interest in a partnership not subject to the passive loss rules. Through the use of $800,000 of nonrecourse financing, the partnership acquires assets worth $1 million. The activity produces a loss of $150,000, of which Kelly’s share is $30,000. In 2013, Kelly’s share of the loss from the partnership is $15,000. How much of the loss from the partnership can Kelly deduct?

85. 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?

86. Anne sells a rental house for $100,000 (adjusted basis of $55,000). 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.

87. Hugh has four passive activities which generate the following income and losses in the current year.

Activity	Gain (Loss)
A	($60,000)
B	(20,000)
C	(10,000)
D	10,000
Total	($80,000)

How much of the $80,000 net passive loss can Hugh deduct this year? Calculate the suspended losses (by activity).

88. Pat sells a passive activity for $100,000 that has an adjusted basis of $55,000. During the years of her ownership, $60,000 of losses have been incurred that were suspended under the passive activity loss rules. In addition, the passive activity generated tax credits of $10,000 that were not utilized and suspended. Determine the tax treatment to Pat on the disposition of the property.

89. 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?

90. Orange Corporation, a closely held (non-personal service) C corporation, earns active income of $300,000 in the current year. The corporation also receives $35,000 in dividends and incurs a loss of $50,000 from an investment in a passive activity. What is Orange’s income for the year after considering the passive investment?

91. Lloyd, a life insurance salesman, earns a $400,000 salary in the current year. As he works only 30 hours per week in this job, he has time to participate in several other businesses. He owns an ice cream parlor and a car repair shop in Tampa. He also owns an ice cream parlor and a car repair shop in Portland and a car repair shop in St. Louis. A preliminary analysis on December 1 of the current year shows projected income and losses for the various businesses as follows:

	Income (Loss)
Tampa ice cream parlor (95 hours participation)	$56,000
Tampa car repair shop (140 hours participation)	(89,000)
Portland ice cream parlor (90 hours participation)	34,000
Portland car repair shop (170 hours participation)	(41,000)
St. Louis car repair shop (180 hours participation)	(15,000)

Lloyd has full-time employees at each of the five businesses listed above. Review all possible groupings for Lloyd’s activities. Which grouping method and other strategies should Lloyd consider that will provide the greatest tax advantage?

92. Vail owns interests in a beauty salon, a natural foods store, and a tanning salon. Several full-time employees work at each of the enterprises. As of the end of November of the current year, Vail has worked 180 hours in the beauty salon, 220 hours at the natural foods store, and 80 hours at the tanning salon. These three ventures collectively will produce income. Vail also owns one other passive activity that is producing a loss (a limited partnership in which she has reported no participation). How should Vail plan her activities for the remainder of the year?

93. 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 loss rules?

94. During the current year, Ryan performs personal services as follows: 700 hours in his management consulting practice, 650 hours in a real estate development business, and 550 hours in an apartment leasing operation. He expects that losses will be realized from the two real estate ventures while his consulting practice will show a profit. Ryan files a joint return with his wife whose salary is $125,000. Discuss the character and treatment of the income and losses generated by these activities.

95. In the current year, Lucile, who has AGI of $70,000 before considering rental activities, is active in three separate real estate rental activities and is in the 28% tax bracket. She had $15,000 of losses from Activity A, $25,000 of losses from Activity B, and income of $20,000 from Activity C. She also had $3,100 of tax credits from Activity A. Calculate her deductions and credits currently allowed and the suspended losses and credits.

96. 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?

97. Barb borrowed $100,000 to acquire a parcel of land to be held for investment purposes and paid interest of $11,000 on the loan. She has AGI of $75,000 for the year. Other items related to Barb’s investments include the following:

Investment income	$10,000
Long-term capital gain on sale of stock	7,500
Investment counsel fees	2,000

Barb is unmarried and elects to itemize her deductions. She has no miscellaneous itemized deductions other than the investment counsel fees.

a.	Determine Barb’s current investment interest deduction, assuming she does not make any special election regarding the computation of investment income.
b.	Discuss the treatment of Barb’s investment interest that is disallowed in the current year.
c.	What election could Barb make to increase the amount of her current investment interest deduction?

98. Describe the types of activities and taxpayers that are subject to the at-risk rules.

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

100. 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?

101. List the taxpayers that are subject to the passive loss rules and summarize the general impact of these rules on these taxpayers.

102. What special passive loss treatment is available to real estate activities?

103. When a taxpayer disposes of a passive activity by gift, what happens to any unused passive losses?

104. Describe the general rules that limit the deduction of investment interest expense.

105. Identify the types of income that are classified as investment income. Discuss the flexibility that a taxpayer has with respect to certain types of income that may potentially be considered investment income.