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Exam 11: Investor Losses

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Question 51

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Match the term with the correct response. More than one response may be correct. -Active participation.

A) Taxpayer devotes time aggregating more than 500 hours in all significant participation activities during the year.
B) Participates in making management decisions in a significant and bonafide sense.
C) One in which the individual's participation equals more than 100 hours during the year.
D) Taxpayer devotes time in the activity which constitutes substantially all of the participation in the activity of all individuals.
E) Both options a. and d. are correct.
F) No correct choice is given.

G) B) and C)
H) A) and D)

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Question 52

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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.

A) True
B) False

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Question 53

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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.

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.

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

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.

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?

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.

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.

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.

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.

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.

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.

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.

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.

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?

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

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?

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 at­risk 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?

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