Deck 12: Deductions for Certain Investment Expenses and Losses

Question 1

The at-risk rules generally limit the amount of deductible losses from an activity to the amount of resources that the investor has committed to the activity.

Answer 1

True

Question 2

L is a limited partner in a partnership that leases heavy-duty equipment (e.g., bulldozers, backhoes, compactors, excavators).L's at-risk amount increases as the partnership's recourse debt increases.

Answer 2

False

Question 3

Losses that are not deductible due to the at-risk limitations are carried back two years and then forward 20 years.

Answer 3

False

Question 4

A taxpayer's at-risk amount increases only for contributions of cash and property and income earned by the activity that is not withdrawn from the business.

Question 5

The Trinity Group, an S Corporation, is owned by Tom Trinity.Tom serves as CEO of the organization.The company owns and operates a number of hotels and motels in Louisiana and Mississippi.Individuals typically stay at the hotels one or two days.Losses flowing from the corporation to Tom will be limited by both the at-risk rules and the passive activity rules.

Question 6

The form of organization usually used for traditional tax shelters is a C corporation.

Question 7

The acceleration of expenses to early periods and the postponement of income to later periods are key ingredients of most tax shelters.The term used to describe this aspect of a tax shelter is conversion.

Question 8

In tax shelter jargon, conversion concerns the differing tax treatments given to losses arising from the tax shelter activity and the gains upon the sale of the activity.

Question 9

Oxbow LLC develops apartment complexes all around the metropolitan area of Dallas.The company creates separate partnerships in which it serves as a general partner.Each partnership purchases land, hires an architect and contractor that build the apartments, and then operates complex.The development activity is financed out of nonrecourse loans made by First National Bank of Ohio that has a 20 percent interest in the deal.The loans are at reasonable rates and comparable to those made to other borrowers.In addition, the loans are secured by the real estate.This year L purchased an investment interest in one of the partnerships, West Albany LLC.L's share of the nonrecourse debt is included in his at-risk amount.

Question 10

The at-risk amount is reduced by distributions and losses.

Question 11

This year L's share of losses from an investment in a partnership is $10,000.Any loss that is not deductible due to the at-risk limitations is carried forward and is deducted in future years to the extent she has amounts at-risk.

Question 12

In determining the amount of that a taxpayer can deduct from an activity, the at-risk rules are applied before the passive loss rules.

Question 13

J and K decided they wanted to get in the rental real estate business.This year J and K formed a partnership.The partnership bought a 200 unit complex called Lazy Acres from the Trumpet Group for $1,000,000.The partnership gave Trumpet $200,000 cash and a note for $800,000 which was secured by the apartment complex.For purposes of the at-risk rules, the note to Trumpet is considered qualified nonrecourse financing.

Question 14

The at-risk rules generally do not operate to restrict losses from real estate investments as long as they are financed through loans made by commercial banks at market rates of interest.

Question 15

In determining the amount of loss that a taxpayer can deduct from an activity, both the at-risk and passive loss limitations must be applied.

Question 16

G is a general partner in a partnership that leases heavy-duty equipment (e.g., bulldozers, backhoes, compactors, excavators).G's at-risk amount increases as the partnership's recourse debt increases.

Question 17

The at-risk and passive loss rules operate so as to affect the character of gain or loss on the sale of an investment activity.

Question 18

X is a general partner in a general partnership that leases heavy-duty equipment (e.g., bulldozers, backhoes, compactors, excavators).All of the equipment purchases are financed using nonrecourse debt that is secured by the equipment.X's at-risk amount includes his share of recourse and nonrecourse debt.

Question 19

The effect of the passive activity rules is to deny favorable capital gain treatment on the sale of certain investments.

Question 20

J and K decided they wanted to get in the rental real estate business.This year J and K formed a partnership.The partnership bought a 200 unit complex called Lazy Acres from the Trumpet Group for $1,000,000.The partnership gave Trumpet $200,000 cash and a note for $800,000 which was secured by the apartment complex.The partnership borrowed the cash from the First National Bank of Boston and secured the loan with a parcel of land that it owned.For purposes of the at-risk rules, the amount of debt secured by the land is included in the at-risk amount.

Question 21

P is the sole shareholder as well as an employee of PQ Accounting Services Incorporated.The corporation concentrates on tax return preparation and preparation of monthly financial statements.P currently owns an interest in a limited partnership in which he expects to generate losses for the next several years.Assuming P transfers the interest in the partnership to the corporation, any losses of the partnership may be used to reduce the corporation's taxable income.

Question 22

This year T sold his interest in Century Properties, a limited partnership, for a gain of $40,000.At the time of the sale, T had suspended losses attributable to Century of $25,000.For the year, T also had a $32,000 loss from Mervin Gardens, another limited partnership interest.T will carry over the entire $32,000 loss from Mervin Gardens to the following year.

Question 23

A regular C corporation that is owned by five unrelated parties is not subject to the passive loss rules.

Question 24

S owns a duplex, which she rents out on a long-term basis.Although she is actively involved in managing the property, no significant services are provided.During the year, S earned a salary of $70,000 and had interest income of $10,000.Assuming the rental activity generates a $20,000 loss, all of the loss may be used by S to reduce her salary and interest income.

Question 25

Rental activities and other trade or business activities cannot be aggregated since up to $25,000 of losses from certain rental activities may be deducted annually.

Question 26

Deductible net operating losses occur only after the losses have survived the at-risk and passive loss rules.

Question 27

An activity that constitutes a rental for purposes of the passive loss rules is always passive regardless of the taxpayer's participation except when the exception for real estate developers applies.

Question 28

Brian and his father-in-law formed Southern Sands Golf Club LLC.It is a daily fee course (not a private club).They advertise it as "your country club for a day." The activity would be considered a rental activity and automatically passive since they are renting the course for use of their patrons.

Question 29

B owns 10 hardware stores, each located in a different city.Since each store is located in a separate city he must treat each store as a separate activity.

Question 30

During the year, Mr.Y joined together in a partnership with Ms.Z to form Pizza and Videos to Go.Mr.Y provided only the financial backing, while Ms.Z managed the operation.During the first year of operations, the partnership generated a loss.Mr.Y and Ms.Z may use their respective shares of the loss (in their entirety) to reduce their investment income.

Question 31

L is the sole shareholder and an employee of LDI Incorporated.The corporation manufactures custom-made kitchen cabinets.L currently owns an interest in a limited partnership in which he expects to generate losses for the next several years.Assuming L transfers the interest in the partnership to the corporation, any losses of the partnership may be used to reduce the corporation's operating income.

Question 32

Suspended losses from a passive activity can be deducted against portfolio and other income if the taxpayer sells his entire interest in the activity,

Question 33

C is a C.P.A.and operates his own practice out of a seven story building that he owns.He rents out five floors and uses two for his own business.This year he had a loss of $30,000 from the rental side of his operations.His accounting practice netted a profit of $600,000.C may offset the $30,000 loss against the $600,000 profit from his business.

Question 34

Passive losses normally can be used to offset other passive income such as interest and dividends.

Question 35

A group of doctors own Glenbrook Manor LLC, which owns and operates a nursing home.The home has 130 units where its tenants live and receive skilled nursing care.Each tenant signs an annual lease.The LLC would automatically be considered a passive activity since it is a rental business.

Question 36

D operates a small rental car agency by the airport.Most of his customers rent cars for one or two days.D's operation is not considered a rental activity for purposes of the passive loss rules.

Question 37

During the year, J sold his interest in Sterling XXI, a limited partnership, for a gain of $30,000.At the time of the sale, J had suspended losses from Sterling of $50,000.For the year, J also had a loss from another passive activity of $35,000.As a result, J's taxable income will decrease by $50,000, and he will have a suspended loss of $5,000.

Question 38

Publicly traded corporations normally would not be subject to the passive loss rules.

Question 39

A passive loss includes a loss from the sale of an investment such as stock of a publicly held company like IBM where the taxpayer is merely an investor and does not work for the company.

Question 40

During the year, Q, employed full time as an attorney, spent 550 hours managing an apartment complex he owns.The operation of the apartment complex is considered a passive activity

Question 41

During the year, R earned a salary of $100,000 and received interest and dividend income.In addition, his interest in a limited partnership, in which he is a passive investor, produced a loss of $5,000.Which of the following statements is true?

A)R can deduct the loss to the extent of his interest and dividend income.
B)R can never deduct this loss.
C)R cannot deduct the loss but can carry it over and deduct it in subsequent years under the appropriate circumstances.
D)More than one but less than all of the above statements are true.
E)None of the above statements is true.

Question 42

The at-risk rules effect which of the following?

A)Whether income from an investment is tax-exempt or taxable
B)Whether gain on the sale of an investment activity is taxed as favorable long-term capital gain or ordinary income
C)Whether the losses from an activity's operations can be deducted in the current year
D)More than one of the above

Question 43

Among the three businesses that F owns, the only one that does not make a profit is a restaurant.F has spent about 400 hours this year trying to turn the business around.He has spent about 350 hours in each of the other two activities (a total of 700 hours).F may offset the loss attributable to the restaurant against the profits from his other businesses.

Question 44

Interest expense incurred by a passive activity in which a taxpayer has an interest can be deducted against any interest income that the taxpayer has.

Question 45

In a tax shelter investment, phantom income and turnaround are most likely to be attributable to which of the following?

A)Deferral
B)Conversion
C)Leverage
D)None of the above

Question 46

E owns a condominium on the Emerald Coast of Florida.The condominium is contained in a 12 story high rise overlooking the beach.This year the management company that manages the unit for E rented it to an elderly couple from Michigan for the months of January through April.The management company provided telephone, cable, trash removal, and laundry service.Assuming the average rental period was about 30 days, E's activity is treated as a rental activity for purposes of the passive loss rules.

Question 47

V owns a small beach-front cottage (her second home), which she rented out during the past year.She is actively involved in this rental activity, which is her only venture of this type.She rented the cottage for 200 days during the year for $10,000.She also used it personally for 18 days.During the year, expenses allocable to the rental activity were, interest $5,000, taxes $4,000, maintenance and insurance $1,000, and depreciation expenses allocable to the cottage of $4,000.For the year, her adjusted gross income was $80,000.With respect to the expenses attributable to the rental, V may

A)Deduct expenses of $ 10,000
B)Deduct expenses of $10,000 and the balance of any remaining expenses to the extent of any passive income that she may have
C)Deduct $14,000 of expenses
D)Deduct none of the expenses
E)Deduct none of the above

Question 48

J owns a vacation home (his second home) in Michigan.During the year, he rented it out for two weeks and used it for personal purposes three weeks.His expenses directly related to renting out the property were, utilities, $280, and maid service, $75.The portion of taxes allocable to the rental activity was $50.Income from the rental was $300.J will

A)Report income of $300 and deduct $405
B)Report no income and deduct no expenses related to the vacation home
C)Report no income and deduct $50
D)Report income of $300 and deduct $300
E)Report none of the above

Question 49

H owns an apartment complex of 30 units.One of his tenants manages the property in exchange for use of an apartment rent-free.H makes all of the major decisions regarding the units and is in regular contact with his manager.This year, the complex generated a loss of $35,000.Assuming H's A.G.I.is $120,000, H may deduct

A)None of the loss
B)$25,000 and carryover $ 10,000 of the loss
C)$ 15,000 and carryover $20,000 of the loss
D)$ 15,000 and carryover $ 10,000 of the loss
E)None of the above

Question 50

J owns a 50 percent interest in an S corporation.This year the S corporation produced a loss of $100,000.In determining the amount of loss that J may deduct, which of the following statements is true?

A)The passive loss limitations are applied before the at-risk limitations
B)The at-risk limitations are applied before the passive loss limitations
C)Neither the passive loss limitations nor the at-risk limitations apply in determining the amount of loss that is deductible.
D)None of the above is correct.

Question 51

One of the reasons the at-risk rules did not achieve their objective and the passive loss rules were required concerned

A)The treatment of nonrecourse debt
B)The treatment of recourse debt
C)The ability of taxpayer's to utilize leverage
D)The limited scope of the rules (i.e., they applied only to a few activities)

Question 52

J owns a condominium in Myrtle Beach.He rented it out for seven months during the year (210 days).During the year, J used the condo for personal purposes for less than 15 days.J does not have to report any of the income but he is not entitled to deduct any of the related expenses.

Question 53

M is a 25 percent limited partner in an oil and gas partnership.He acquired his interest in the partnership by contributing $5,000 cash and land with an adjusted basis to him of $6,000 and a fair market value of $10,000.The partnership has outstanding recourse debt of $30,000 and outstanding nonrecourse debt of $80,000 on December 31, 20X1 and 20X2.For 20X1 the partnership produced a loss of $100,000.Ignoring the passive loss rules, how much of this loss may he deduct?

A)$11,000
B)$18,500
C)$25,000
D)$38,500
E)None of the above

Question 54

G owns a small rustic farm (her second home) in New England, which she rented out to tourists during the past year.She is actively involved in this rental activity, which is her only venture of this type.She rented the farm for 200 days during the year for $10,000.She also used it personally for 35 days.During the year, expenses allocable to the rental activity were, interest $5,000, taxes $4,000, maintenance and insurance $1,000, and depreciation expense allocable to the cottage of $4,000.For the year, her adjusted gross income was $160,000.With respect to the expenses attributable to the rental, G may

A)Deduct expenses of $10,000
B)Deduct expenses of $10,000 and the balance of any remaining expenses to the extent of any passive income that she may have
C)Deduct $ 14,000 of expenses
D)Deduct none of the expenses
E)Deduct none of the above

Question 55

Tax shelters are typically built on three elements, including

A)Deferral
B)Conversion
C)Leverage
D)All of the above

Question 56

L owns a condominium at Cape Cod.This year he rented it out for 210 days.During the year, L used the condo for personal purposes for two weeks during June.Interest expense on the unit's mortgage for the year allocable to the personal use was $9,000.The $9,000 of interest expense is deductible assuming the condominium qualifies as L's primary or secondary residence.

Question 57

K owns a condominium in Vail.This year he rented it out for 210 days.During the year, K used the condo for personal purposes for the entire month of December.The activity is not treated as a rental activity for purposes of the passive loss rules.