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Exam 6: Losses and Loss Limitations

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Question 61

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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 activity 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 activity 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.

F) C) and E)
G) C) and D)

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Question 62

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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 activity 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 activity loss rules.
E) None of the above is incorrect.

F) A) and E)
G) A) and B)

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Question 63

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​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.

A bond held by an investor that is uncollectible will be treated as a worthless security and hence, produce a capital loss.

A business bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless.

Hugh has four passive activities which generate the following income and losses in the current year. $\begin{array} { c r } \text { Activity } & \text { Gain (Loss) } \\\hline \text { A } & ( \$ 60,000 ) \\\text { B } & ( 20,000 ) \\\text { C } & ( 10,000 ) \\\text { D } & 10,000 \\\text { Total } & \underline { ( \$ 80,000 ) }\end{array}$ How much of the $80,000 net passive activity loss can Hugh deduct this year? Calculate the suspended losses (by activity).

Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive activity 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 taxpayer can carry any NOL incurred forward up to 20 years.

On July 20, 2016, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock) for $24,000.On November 10, 2016, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000.On September 15, 2017, Matt sold the 4,000 shares of stock for $120,000.How should Matt treat the sale of the stock on his 2017 return?

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?

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

Bruce, who is single, had the following items for the current year: ? Salary of $80,000. ? Gain of $20,000 on the sale of § 1244 stock acquired two years earlier. ? Loss of $75,000 on the sale of § 1244 stock acquired three years earlier. ? Worthless stock of $15,000.The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year. Determine Bruce's AGI for the current year.

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: ​ $\begin{array} { l r } & \text { Income (Loss) } \\\text { Tampa ice cream parlor (95 hours participation) } & \$ 56,000 \\\text { Tampa car repair shop (140 hours participation) } & ( 89,000 ) \\\text { Portland ice cream parlor (90 hours participation) } & 34,000 \\\text { Portland car repair shop (170 hours participation) } & ( 41,000 ) \\\text { St. Louis car repair shop (180 hours participation) } & ( 15,000 )\end{array}$ ​ 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?

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.

James is in the business of debt collection.He purchased a $20,000 account receivable from Green Corporation for $15,000.During the year, James collected $17,000 in final settlement of the account.James can take a $2,000 bad debt deduction in the current year.

A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.

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

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.

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

Five years ago, Tom loaned his son John $20,000 to start a business.A note was executed with an interest rate of 8%, which is the Federal rate.The note required monthly payments of the interest with the $20,000 due at the end of ten years.John always made the interest payments until last year.During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800.Tom is an accrual basis taxpayer whose only income is salary and interest income.The proper treatment for the nonpayment of the note is: