Question 1

Two separate business operations conducted at the same location may be treated as separate activities under the passive activity rules.

Accepted Answer

Two separate business operations conducted at the same location may be treated as separate activities under the passive activity rules if they are not related and involve different types of business activities. This allows for each activity to be evaluated separately for purposes of determining passive activity losses or credits.

Question 2

If a taxpayer disposes of an interest in a passive activity,unused carryover losses are available to the purchaser of the interest.

Accepted Answer

The answer of If a taxpayer disposes of an interest...

Question 3

Before consideration of stock sales,Rex has generated $150,000 of AGI this year due to salary,interest income and dividends.Rex is a single taxpayer.He plans to sell his shares of Trisco Inc. ,a qualifying small business corporation under Sec.1244,realizing a $110,000 loss.Due to the sale of the stock,he will reduce his AGI by
A)$3,000.
B)$110,000.
C)$50,000.
D)$53,000.

Accepted Answer

D)The sale of the Sec.1244 stock will result in a $50,000 ordinary loss and a $60,000 capital loss.He will recognize the full $50,000 loss,but will be limited to recognition of $3,000 of the capital loss.

Question 4

A passive activity includes any rental activity or any trade or business in which the taxpayer does not materially participate.

Accepted Answer

A passive activity is defined as any rental activity or any trade or business in which the taxpayer does not materially participate. Material participation is determined based on the amount of time and effort the taxpayer contributes to the activity. If the taxpayer does not meet the material participation standard, then the activity is considered passive.

Question 5

Once an activity has been classified as passive,it is considered passive with regard to that taxpayer until it is sold.

Accepted Answer

The answer of Once an activity has been classified as...

Question 6

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)
A)ordinary loss of $125,000.
B)long-term capital loss of $125,000.
C)long-term capital loss of $100,000 and ordinary loss of $25,000.
D)ordinary loss of $100,000 and long-term capital loss of $25,000.

Accepted Answer

Since the stock qualifies as Sec. 1244 stock, the maximum ordinary loss allowed is $100,000 ($50,000 for single taxpayers). Therefore, Stacy can claim an ordinary loss of $100,000 on her sale of stock. However, since she sold the stock for $100,000 and her basis was $225,000, she also has a long-term capital loss of $25,000 ($225,000 - $100,000 = $125,000 basis, $100,000 sale price, $25,000 loss). Therefore, the correct answer is D.

Question 7

For purposes of the application of the passive loss limitations,a closely held C corporation is a C corporation in which more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.

Accepted Answer

This statement is true. According to the IRS, a closely held C corporation is one in which more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.

Question 8

For purposes of applying the passive loss limitations for rental real estate,active participation requires a greater time commitment by the taxpayer than does material participation.

Accepted Answer

Active participation requires at least 10% participation in the activity and a minimum of 100 hours of participation during the year. Material participation, on the other hand, requires at least 500 hours of participation in the activity during the year. Therefore, material participation requires a greater time commitment than active participation.

Question 9

A closely held C corporation's passive losses may offset its portfolio income.

Accepted Answer

The answer of A closely held C corporation's passive losses...

Question 10

A taxpayer may deduct suspended losses of a passive activity when the taxpayer completely terminates his or her ownership of the activity.

Accepted Answer

This is true according to the tax code. When a taxpayer completely disposes of a passive activity, they may deduct any remaining suspended losses from that activity against their other income.

Question 11

Losses from passive activities that cannot be deducted currently are carried over for up to 5 subsequent years.

Accepted Answer

The answer of Losses from passive activities that cannot be...

Question 12

Partnerships and S corporations must classify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.

Accepted Answer

Partnerships and S corporations are required to apply the passive activity rules and report the results of their operations by activity to the partners or shareholders.

Question 13

All of the following are true of losses from the sale or worthlessness of small business corporation (Section 1244)stock with the exception of
A)the stock must be owned by an individual or a partnership.
B)the stock must have been issued by a domestic corporation.
C)the stock must have been issued for cash or property other than stock or securities.
D)a single taxpayer may deduct,as ordinary losses,up to a maximum of $100,000 per tax year with the remainder treated as capital losses.

Accepted Answer

The answer of All of the following are true of...

Question 14

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
A)a $50,000 ordinary loss and $70,000 LTCL.
B)a $50,000 STCL and a $70,000 LTCL.
C)a $100,000 ordinary loss and a $20,000 LTCL.
D)a $100,000 LTCL and a $20,000 ordinary loss.

Accepted Answer

Since the stock meets the Section 1244 requirements, Amy can take an ordinary loss of up to $50,000 and the remaining loss will be a long-term capital loss. In this case, Amy's ordinary loss is $50,000 and her long-term capital loss is calculated as follows: 
Sale price - basis = $30,000 - $150,000 = ($120,000) 
Since the sale occurred more than one year after Amy acquired the stock, the $120,000 loss is a long-term capital loss. Therefore, Amy has a $50,000 ordinary loss and a $70,000 long-term capital loss.

Question 15

Individuals who actively participate in the management of rental real property may deduct up to $25,000 in losses,subject to AGI limitations.

Accepted Answer

This statement is true. According to the IRS, individuals who actively participate in the management of rental real property may deduct up to $25,000 in losses, subject to AGI limitations.

Question 16

Material participation by a taxpayer in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year.

Accepted Answer

Material participation by a taxpayer in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year. This is a requirement under the IRS rules for determining whether an activity is considered passive or not. If a taxpayer meets this requirement, they may be able to deduct losses from the activity on their tax return.

Question 17

When applying the limitations of the passive activity rules,a taxpayer's AGI is classified into active income,portfolio income and passive income.For this purpose,portfolio income includes dividends,interest,annuities,and royalties.

Accepted Answer

This statement is true. Portfolio income includes dividends, interest, annuities, and royalties under the passive activity rules.

Question 18

Individual taxpayers can offset portfolio income with passive losses.

Accepted Answer

The answer of Individual taxpayers can offset portfolio income with...

Question 19

Erin,a single taxpayer,has 1,000 shares of 1244 stock she purchased directly from AAA Corporation for $120,000 five years ago.The stock has a FMV of $30,000,and Erin is thinking of selling the stock.She has no other capital gains or losses for the year.Discuss the tax consequences and planning opportunities relating to selling the stock.

Accepted Answer

The answer of Erin,a single taxpayer,has 1,000 shares of 1244...

Question 20

Why was Section 1244 enacted by Congress? Specifically,consider and discuss some of the individual qualifying requirements of Sec.1244.

Accepted Answer

The answer of Why was Section 1244 enacted by Congress?...

Quiz 8: Losses and Bad Debts