Question 1

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

Accepted Answer

The law allows a taxpayer to recognized suspended passive losses when the ownership is completely terminated.

Question 2

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

A rental real estate activity which does not meet the real property trade or business standard may still allow recognition of losses up to $25,000 if the owner meets certain criteria.

Question 3

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 4

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?...

Question 5

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

Accepted Answer

Losses may be carried over indefinitely.

Question 6

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

Accepted Answer

A)The loss realized is $30,000 - $150,000 = ($120,000).Since the stock is Section 1244 stock and Amy is an original owner,the first $50,000 (for single individuals)of the loss is treated as ordinary.The remainder of $70,000 ($120,000 - $50,000)is treated as long-term capital loss since Amy held the stock longer than 12 months.

Question 7

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

Accepted Answer

The law includes rental property in the definition of passive activity,unless the rental activity is considered a "real property trade or business."

Question 8

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

D)Single taxpayers may deduct up to $50,000 per tax year.

Question 9

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

D)The loss realized is $100,000 - $225,000 = ($125,000).Since the stock is Section 1244 stock and Stacy is an original owner,the first $100,000 (for married individuals)of the loss is treated as ordinary.The remainder of $25,000 ($125,000 - $100,000)is treated as long-term capital gain since Stacy held the stock longer than 12 months.

Question 10

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

Accepted Answer

Taxpayers must examine all the relevant facts and circumstances to determine whether activities constitute an "appropriate economic unit."

Question 11

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 taxpayer will recognize his unused carryover passive losses when his passive activity is disposed of in a taxable transaction.

Question 12

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 is the correct definition of portfolio income.

Question 13

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

Accepted Answer

The taxpayer can become a material participant in an activity at a later time.Status is determined each year.

Question 14

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

Accepted Answer

A closely held corporation is allowed to deduct excess passive losses against active trade or business income,but cannot offset portfolio income.

Question 15

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

Each partner or shareholder then takes the results from these activities and,using the same rules,combines them where appropriate with operations conducted either directly or through other pass-through entities.

Question 16

Individual taxpayers can offset portfolio income with passive losses.

Accepted Answer

Under the general provisions,passive losses can only offset passive income.

Question 17

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

The general rule for material participation is completion of more than 500 hours.

Question 18

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

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 19

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

The question provides a correct definition of a closely held corporation for purposes of the passive loss limitations.

Question 20

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

Regular,continuous and material involvement is not required for active status so it is a lighter standard of involvement.

Quiz 24: Losses and Bad Debts