Question 1

Amy,a single individual and sole shareholder of Brown Corporation,sold all of the Brown stock for $30,000.The stock basis was $150,000.Amy had owned the stock for 3 years.Brown Corporation meets the Section 1244 requirements.Amy has

Accepted Answer

Since Brown Corporation meets the Section 1244 requirements, Amy can treat $50,000 of the loss as an ordinary loss and the remaining $20,000 as a long-term capital loss. The selling price of $30,000 minus the adjusted basis of $150,000 results in a $120,000 loss. Since the stock was held for more than one year, the portion of the loss related to the holding period is a long-term capital loss. Thus, the final result is a $50,000 ordinary loss and a $70,000 long-term capital loss.

Question 2

Nancy reports the following income and loss in the current year.  All three activities are passive activities with respect to Nancy.Nancy also has $21,000 of suspended losses attributable to activity C carried over from prior years.During the year,Nancy sells activity C and realizes a $15,000 taxable gain.What is Nancy's AGI as a result of these transactions?

Accepted Answer

The answer of Nancy reports the following income and loss...

Question 3

Jorge owns activity X which produced a $20,000 passive loss last year.Jorge's only income last year was wages of $30,000.Jorge is a material participant in activity X this year when it produces a $14,000 loss.This year,Jorge's wages are $40,000.This year,Jorge also has passive activity income from activity Y of $16,000.What is the total passive activity loss carryover to next year?

Accepted Answer

To determine the total passive activity loss carryover to next year, we need to calculate Jorge's current year passive activity loss and net it against any passive activity income.

First, we need to determine if Jorge can deduct his current year passive activity loss of $14,000. Since Jorge is now a material participant in activity X, he can deduct up to $25,000 of losses from the activity against his non-passive income. Since Jorge's wages are $40,000 this year, he can deduct up to the full $14,000 loss from his activity X against his wages.

Next, we need to net Jorge's passive activity income and loss. His passive loss from activity X this year is $14,000, and his passive income from activity Y is $16,000. Therefore, his net passive activity income is $2,000.

Since Jorge had a passive loss of $20,000 from activity X last year and his net passive activity loss this year is only $2,000, he has a passive activity loss carryover of $18,000 ($20,000 - $2,000).

Therefore, the correct answer is C) $4,000.

Question 4

Jamie sells investment real estate for $80,000,resulting in a $15,000 loss.Jamie's loss is

Accepted Answer

Jamie's loss is a capital loss because it resulted from the sale of an investment property.

Question 5

Which of the following is not generally classified as a passive activity?

Accepted Answer

Passive activities generally include rental real estate and investments in limited partnerships. However, if the taxpayer materially participates in the business or investment, it is not considered a passive activity. Therefore, choice D, where the taxpayer owns an interest and works 1,000 hours a year, is not generally classified as a passive activity.

Question 6

Joy reports the following income and loss:  Activities A,B,and C are all passive activities.
Based on this information,Joy has

Accepted Answer

Joy has a salary of $120,000 and net passive losses of $30,000, which means her adjusted gross income is reduced to $90,000. Since activities A, B, and C are all passive activities, the passive losses will be carried over and can be used to offset future passive income.

Question 7

Lewis died during the current year.Lewis owned passive activity property with a FMV of $61,000 and a basis of $48,000.Suspended losses of $15,000 were attributable to the property.How much of the suspended loss is deductible on Lewis's final income tax return?

Accepted Answer

The answer of Lewis died during the current year.Lewis owned...

Question 8

Sarah had a $30,000 loss on Section 1244 stock,a $15,000 loss on sale of a personal use automobile and a $8,000 loss on stock that is not classified as Section 1244.Without regard to net capital loss limitations,Sarah should recognize

Accepted Answer

Section 1244 stock is considered ordinary loss property and thus the $30,000 loss on it is an ordinary loss. The $15,000 loss on the personal use automobile is a capital loss since it is not considered ordinary loss property. The $8,000 loss on the stock that is not classified as Section 1244 is also a capital loss. Therefore, Sarah should recognize an ordinary loss of $30,000 and a capital loss of $8,000, for a total recognized loss of $38,000.

Question 9

During the year,Mark reports $90,000 of active business income from his law practice.He also owns two passive activities.From Activity A,he earns $20,000 of income,and from Activity B,he incurs a $30,000 loss.As a result,Mark

Accepted Answer

The answer of During the year,Mark reports $90,000 of active...

Question 10

Juan has a casualty loss of $32,500 on investment property after receiving an insurance settlement.This is Juan's only casualty transaction this year.Juan's loss is

Accepted Answer

The answer of Juan has a casualty loss of $32,500...

Question 11

A net operating loss can be carried back three years or carried forward five years.

Accepted Answer

The answer of A net operating loss can be carried...

Question 12

Mara owns an activity with suspended passive losses from prior years of $13,000.In the current year,Mara becomes a material participant in the activity.This year the activity generates $6,000 of income.The net effect of this activity on Mara's current year AGI is a(n)

Accepted Answer

Since Mara became a material participant in the activity, the suspended passive losses from prior years become deductible in the year of disposition or if there is net passive income in the activity. Since there is only $6,000 of income generated by the activity, the suspended losses cannot be deducted in the current year, resulting in a net effect of -0- on Mara's AGI.

Question 13

Stacy,who is married and sole shareholder of ABC Corporation,sold all of her stock in the corporation for $100,000.Stacy had organized the corporation in 2009 by contributing $225,000 and receiving all of the capital stock of the corporation.ABC Corporation is a domestic corporation engaged in the manufacturing of ski boots.The stock in ABC Corporation qualified as Sec.1244 stock.The sale results in a(n)

Accepted Answer

Since the stock qualifies as Sec. 1244 stock and has been held for more than one year, any loss on the sale of the stock will be split between an ordinary loss of up to $50,000 and a long-term capital loss. Stacy's basis in the stock was $225,000 and she sold it for $100,000, resulting in a loss of $125,000. The first $50,000 of this loss will be treated as an ordinary loss, and the remaining $75,000 will be a long-term capital loss. Therefore, the correct answer is that Stacy will have an ordinary loss of $100,000 and a long-term capital loss of $25,000.

Question 14

Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss.Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie.During this year,activity B produces a $9,000 loss.In addition,Charlie acquires an investment in activity X,a passive activity,this year.Charlie's share of activity X's income is $13,000.Charlie's salary this year is $70,000.As a result,this year Charlie must

Accepted Answer

Since Charlie's involvement with Activity B is no longer considered passive, he can offset the current year's loss of $9,000 against his salary of $70,000, which will reduce his taxable income to $61,000. Then, he can offset the suspended loss of $17,000 from Activity B against the income of Activity X, which results in $13,000 - $17,000 = -$4,000. However, since the passive loss cannot exceed the passive income, he can offset only $4,000 of the suspended loss against Activity X's income and carry over the remaining $13,000 of suspended loss to the next year.

Question 15

An individual is considered to materially participate in an activity if any of the following tests are met with the exception of

Accepted Answer

The answer of An individual is considered to materially participate...

Question 16

The amount realized by Matt on the sale of property to Caitlin includes all of the following with the exception of

Accepted Answer

The amount realized by Matt includes all cash received, the FMV of any other property received, and any mortgages assumed by the buyer. However, any mortgage paid off by Matt prior to the sale would not be included in the amount realized.

Question 17

Jeff owned one passive activity.Jeff sold the activity and realized a $2,000 gain on the sale.Prior to the sale,he realized a current year loss from the activity of $6,000.In addition,he has suspended losses from prior years of $7,000.What is the net impact on Jeff's AGI this year due to the passive activity?

Accepted Answer

Jeff's realized gain on the sale of the passive activity is subject to the suspended losses from prior years. Therefore, his recognized gain is reduced by the suspended losses of $7,000. 
$2,000 gain - $7,000 suspended losses = $5,000 loss.

Jeff's current year loss of $6,000 can offset other passive income but can only offset up to $5,000 of non-passive income. Therefore, Jeff can deduct $5,000 of his current year loss against his recognized gain.
$5,000 loss (current year) - $5,000 gain (recognized gain after reduction) = $0

Since Jeff's current year loss is fully offset by his recognized gain and the net effect of the suspended losses is a decrease in his AGI, the net impact on Jeff's AGI this year due to the passive activity is a decrease of $11,000.

Question 18

All of the following losses are deductible except

Accepted Answer

The answer of All of the following losses are deductible...

Question 19

In 2000,Michael purchased land for $100,000.Over the years,economic conditions deteriorated,and the value of the land declined to $60,000.Michael sells the property in this year,when it is subject to a $30,000 nonrecourse mortgage.The buyer pays Michael $34,000 cash and takes the property subject to the mortgage.Michael incurs $5,000 in real estate commissions.Michael's gain or loss on the sale is

Accepted Answer

Michael's adjusted basis in the property is $100,000 - $40,000 (depreciation recapture) = $60,000. 
The amount realized on the sale is $34,000 cash + $30,000 mortgage = $64,000. 
Therefore, Michael has a loss of $60,000 (adjusted basis) - $64,000 (amount realized) - $5,000 (real estate commissions) = $41,000. 
Since the loss is greater than the gain, the answer is D.

Question 20

All of the following are true of losses from the sale or worthlessness of small business corporation (Section 1244)stock with the exception of

Accepted Answer

The $100,000 per tax year limit applies to married individuals filing jointly. For single taxpayers, the maximum deduction for ordinary losses is $50,000 per tax year.

Quiz 8: Losses and Bad Debts