CHAPTER 11 INVESTOR LOSSES

1. 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.

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:

(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.

3. 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.

4. 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.

5. 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.

6. 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.

7. Which of the following is nota 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.

8. 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 isa 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 nota 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 nota rental activity.

e. None of the above.

9. 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.

10.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.

11.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.

12.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.

13.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.

14.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.