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.

Accepted Answer

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

Accepted Answer

L's at-risk amount in a partnership does not increase with an increase in recourse debt unless L is personally liable for that debt. Limited partners typically are not personally liable for the partnership's debts, including recourse debts.

Question 3

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

Accepted Answer

Losses that are not deductible due to the at-risk limitations are not carried back but can be carried forward to future years indefinitely until they are fully utilized.

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at-risk amount increases only for contributions of cash and property and income earned by the activity that is not withdrawn from the business.

Accepted Answer

A taxpayer's at-risk amount can increase with contributions of cash and property, income earned by the activity, and certain amounts borrowed for use in the activity, as long as the taxpayer is personally liable for repayment or has pledged property not used in the activity as security.

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.

Accepted Answer

The answer of The Trinity Group, an S Corporation, is...

Question 6

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

Accepted Answer

Traditional tax shelters often use partnerships or S corporations because these structures allow income and losses to be passed through directly to the owners, avoiding the double taxation characteristic of C corporations.

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.

Accepted Answer

The term used to describe this aspect of a tax shelter is deferral, not conversion. Deferral strategies involve delaying tax liabilities to a future period rather than converting the type of income or expense.

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.

Accepted Answer

Conversion refers to the potential difference in tax treatment between the losses generated by the tax shelter and the gains earned upon selling the tax shelter.

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.

Accepted Answer

L's share of the nonrecourse debt is included in his at-risk amount, as stated in the passage.

Question 10

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

Accepted Answer

The at-risk amount is reduced by distributions and losses according to the IRS.

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.

Accepted Answer

This is true according to the at-risk rules for partnership investments. Any portion of a partnership loss that is not currently deductible due to the at-risk limitations is carried forward and deducted in future years to the extent that the taxpayer 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.

Accepted Answer

The at-risk rules determine whether a taxpayer can deduct losses from an activity up to the amount that he or she has at risk in the activity. These rules are applied before the passive loss rules, which limit the deductibility of losses from passive activities (such as rental properties) against other types of income.

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.

Accepted Answer

The note to Trumpet would not be considered qualified nonrecourse financing for at-risk purposes because it is secured by real property and not by the partnership's own assets or activities.

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.

Accepted Answer

The at-risk rules apply to limit the amount of losses that can be deducted in certain types of passive activities, but real estate investments financed through loans made by commercial banks at market rates of interest are generally not subject to these restrictions.

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.

Accepted Answer

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

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.

Accepted Answer

The at-risk amount of a partner in a partnership represents the amount of money that the partner can potentially lose in the business. In a partnership that leases heavy-duty equipment, the partnership's recourse debt is a factor that affects the amount of risk that G is exposed to. As the partnership's recourse debt increases, G's at-risk amount also increases. Therefore, the statement is true.

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.

Accepted Answer

The at-risk and passive loss rules limit the amount of loss a taxpayer can deduct in a given year from an investment activity, but they do not affect the character of the gain or loss on the sale of the investment.

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.

Accepted Answer

In a general partnership, a partner's at-risk amount generally includes only his share of recourse debt, not nonrecourse debt, because nonrecourse debt is secured by the property (in this case, equipment) and the lender cannot pursue the borrower personally beyond the collateral.

Question 19

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

Accepted Answer

The passive activity rules primarily limit the ability to deduct passive activity losses against other types of income, rather than affecting the capital gains treatment of the sale of 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.

Accepted Answer

According to the at-risk rules, debt that is secured by property owned by the taxpayer is included in the at-risk amount. Therefore, the loan secured by the parcel of land owned by the partnership must be included in the at-risk amount for J and K's partnership.

Quiz 12: Deductions for Certain Investment Expenses and Losses