Chapter 7
a
74. Which of the following is true concerning capital losses and net operating losses for corporations:
Capital loss Net operating loss
a.
Carried back 5 years Carried back 2 years
b.
Carried back 5 years Carried forward 20 years
c.
Carried back 3 years Carried forward 20 years
d.
Carried back 5 years Carried forward 5 years
e.
Carried back 3 years Carried forward 5 years
c
75. Billingsworth Corporation has the following net capital gains and losses for 2012 through 2015. Billingsworth’
marginal tax rate is 34% for all years.
2012
2015
$8,000
$(9,000)
In 2014, Billingsworth Corporation earned net operating income of $30,000. What is/are the tax effect(s) of the $9,000 net
capital loss in 2015?
I.
Corporate taxable income is $21,000.
II.
The net capital loss will provide income tax refunds totaling $3,060.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
76. During the current year, Schmidt Corporation has operating income of $75,000 and a net capital loss of $25,000. What
is Schmidt’s taxable income?
a.
$- 0 –
b.
$50,000
c.
$72,000
d.
$75,000
e.
$90,000
77. Melinda and Riley are married taxpayers. During the year, they completed a single capital asset sale in which a loss of
$120,000 is realized on the sale ($15,000 amount realized, less $135,000 adjusted basis) of qualified small business stock.
How much of the loss can the taxpayers deduct?
a.
$3,000
b.
$53,000
c.
$100,000
d.
$103,000
e.
$120,000
78. Rosanna, a single taxpayer, owns 2,000 shares of qualifying small business stock that she purchased for $225,000.
During the current year, she sells 800 of the shares for $30,000. If this is the only stock Rosanna sells during the year,
what can she deduct as an ordinary and capital loss?
Ordinary loss Capital loss
a.
$58,000 $- 0 –
b.
$50,000 $3,000
c.
$50,000 $10,000
d.
$- 0 – $3,000
e.
$- 0 – $60,000
79. Roscoe and Amy are married and own 12,000 shares of qualifying small business stock that they purchased for
$150,000. During the current year, they sell 10,000 shares of the small business stock to an unrelated third party for
$30,000. Eager to sell the remaining shares, they sell the other 2,000 shares to Amy’s sister for $4,000. In addition, they
sell stock with a basis of $5,000 for $10,000. The stock was acquired in 2007. In 2010, Roscoe and Amy loaned her
brother, Carl, $8,000 to start his business. Carl has only repaid $2,000 on his documented loan. During the year, Carl has
filed for bankruptcy. The bankruptcy court liquidates all of Carl’s assets and Roscoe and Amy receive nothing from the
liquidation.
I.
Roscoe and Amy can deduct $120,000 as an ordinary loss on the small business stock.
II.
Roscoe and Amy have a net short-term capital loss of $1,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
80. Aunt Bea sold some stock she purchased several years ago for $10,000 to her nephew, Andy, for $6,000.
I.
If this is Aunt Bea’s only stock transaction, she can deduct only $3,000 of the loss.
II.
If Andy sells the stock for $10,000, his taxable gain is $4,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
81. Frasier sells some stock he purchased several years ago for $10,000 to his brother, Niles, for $6,000.
I.
If this is Frasier’s only stock transaction, he can deduct only $3,000 of the loss.
II.
If Niles sells the stock for $10,000, his taxable gain is $4,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
82. Georgia sells stock she purchased for $20,000 to her brother Billy for $12,000. Two years later, Billy sells the stock to
Chapter 7
Allie, an unrelated individual, for $22,000. What is Billy’s recognized gain or loss?
a.
$- 0 –
b.
$ 2,000 gain
c.
$10,000 gain
d.
$ 8,000 loss
e.
$ 6,000 loss
83. Lisa sells some stock she purchased several years ago for $10,000 to her brother Bart for $8,000. One year later Bart
sells the stock for $12,000. The tax consequences to Lisa and Bart are:
Lisa Bart
a.
$2,000 loss $4,000 gain
b.
No gain or loss $4,000 gain
c.
No gain or loss $2,000 gain
d.
$2,000 gain No gain or loss
e.
$2,000 loss $2,000 gain
84. Olivia sells some stock she purchased several years ago for $9,000 to her brother Jack for $12,000. One year later Jack
sells the stock for $15,000. The tax consequences to Olivia and Jack are:
Olivia Jack
a.
$3,000 gain $3,000 gain
b.
No gain or loss $6,000 gain
c.
No gain or loss $3,000 gain
d.
$3,000 gain $6,000 gain
e.
No gain or loss No gain or loss
85. Sylvia owns 1,000 shares of Sidney Sails, Inc., for which she paid $18,000 several years ago. On March 15, she
purchases 400 additional shares for $5,000. Sylvia sells the original 1,000 shares for $13,500 on April 1. These are her
only stock transactions during the year. Sylvia’s capital loss deduction for the current year and her basis in the new shares
are:
Capital loss Basis
a.
$3,000 $5,000
b.
$2,700 $6,800
c.
$4,500 $5,000
d.
$3,000 $6,800
e.
$2,700 $5,000
86. Hamlet, a calendar year taxpayer, owns 1,000 shares of Vanity Corporation common stock, which he purchased two
years ago for $4,000. Hamlet sells all of his shares on December 29, 2015, for $2,500. On January 23, 2016, he purchases
600 shares of Vanity Corporation common stock. What is the amount of Hamlet’s recognized loss in 2015?
a.
$- 0 –
b.
$600
Chapter 7
c.
$900
d.
$1,500
e.
$4,000
87. The wash sale provisions apply to which of the following?
I.
Tom realizes an $8,000 loss on the June 17, 2015, sale of 650 shares of Roadrunner
Corporation common stock. He replaces the 650 shares with Hawke Inc., stock on July 8,
2015.
II.
Rosie realizes a $6,000 loss on the December 29, 2014, sale of 40 Billings corporate bonds.
Each bond has a face value of $1,000. She replaces the Billings corporate bonds with 30
Redeemer corporate bonds, each with a face value of $1,000 on January 16, 2015. The
Redeemer bonds have the same interest rate, maturity date, but a different bond rating
(AAA) as the Billings bonds.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
88. The wash sale provisions apply to which of the following?
I.
Jim bought 500 additional shares of Alfa Gamma stock for $4,000 on December 2, 2015.
Jim owned 2,500 shares after that purchase. On December 26, 2015, Jim realizes a loss of
$1,500 on the sale of 250 shares of Alfa Gamma stock.
II.
Calvin realizes a $8,000 loss on the December 29, 2015, sale of Sloan corporate bonds.
Each bond has a face value of $1,000. He replaces the Sloan corporate bonds with the same
number of Jackson corporate bonds, each with a face value of $1,000 on January 16, 2016.
The Jackson bonds have a different interest rate and maturity date then the Sloan bonds but
have the same bond rating (AAA).
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
89. During the year, Daniel sells both of his personal vehicles. On January 10, he realizes a $9,000 loss on the sale of the
first car. On April 5, he realizes a $1,000 gain on the sale of the second car. Assume Daniel’s salary for the year is
$50,000, and he has no other income. What is Daniel’s Adjusted Gross Income?
a.
$40,000
b.
$41,000
c.
$42,000
d.
$50,000
e.
$51,000
e
90. Samantha sells the following assets and realizes the following gains (losses) during the current year:
Home computer (personal)
$(600)
Chapter 7
Municipal bonds
6,000
Stamp collection
3,000
Carpeting from residence
(2,000)
1956 Chevrolet auto
4,000
As a result of these sales, Samantha’s adjusted gross income will:
a.
Increase by $5,000.
b.
Increase by $10,400.
c.
Increase by $11,000.
d.
Increase by $13,000.
e.
Decrease by $ 600.
91. Willie sells the following assets and realizes the following gains (losses) during the current year:
Personal auto
$(5,000)
Municipal bonds
(7,000)
Stamp collection
4,000
Furniture
(6,000)
1% interest in oil well
(8,000)
As a result of these sales, Willie’s adjusted gross income will:
a.
Decrease by $3,000.
b.
Decrease by $4,000.
c.
Decrease by $11,000.
d.
Decrease by $15,000.
e.
Not change.
a
92. During the current year, Cathy realizes
•
a $3,000 loss on the sale of her personal use automobile held 4 years.
•
a $4,000 loss on the sale of Itoham Corporation stock held 3 years for investment.
•
a $2,000 gain on the sale of Sterling, Inc., bonds held 7 months for an investment.
Determine the tax consequences of these events.
a.
Cathy deducts a $5,000 net capital loss.
b.
Cathy deducts a $3,000 net capital loss.
c.
Cathy deducts a $2,000 net capital loss.
d.
Cathy deducts a $1,000 net capital loss.
e.
Cathy deducts a $7,000 net capital loss.
c
93. During the year, Shipra’s apartment is burglarized and her TV and stereo are taken. Her basis in the TV is $1,200 and
it has a fair market value of $700. Her basis in the stereo is $400 and it has a fair market value of $600. What is Shipra’s
theft loss deduction (before considering the annual limitation based upon AGI)?
a.
$- 0 –
b.
$900
c.
$1,000
d.
$1,200
Chapter 7
e.
$1,300
c
94. The Ottomans own a winter cabin in Durango, Colorado. They purchased the cabin in 2004 for $65,000. During the
current year, a blizzard partially destroys the cabin. The fair market value of the cabin after the blizzard is $70,000. The
insurance company estimates that the cost of repairing the cabin will be $40,000. The insurance company will reimburse
the Ottomans for 70% of the repair cost. What can they deduct as a casualty loss if their adjusted gross income for the
year is $80,000?
a.
$3,900
b.
$4,000
c.
$8,000
d.
$11,900
e.
$12,000
a
95. Jerome owns a farm, which has three separate houses. He rents out two of the houses and lives in the other house.
During the current year, a tornado goes through his property causing damage to the houses. Rental House A had a fair
market value of $40,000 and an adjusted basis of $20,000, but it is not damaged by the tornado. A local real estate agent
told Jerome that because of the tornado, property values in the area have declined 10%. Rental House B, which has an
adjusted basis of $25,000, is worth $60,000 before the tornado and $20,000 after the tornado. Jerome’s insurance company
pays him $20,000 for the damage to Rental House B. Jerome’s residence (which has an adjusted basis of $80,000) was
worth $70,000 before it is totally destroyed by the tornado. Jerome’s insurance company reimburses him $60,000 for the
loss of his residence. Ignore the limitation based on Adjusted Gross Income.
I.
Jerome deducts a loss of $5,000 on Rental House A.
II.
Jerome deducts a loss of $35,000 on Rental House B.
III.
Jerome’s loss on his residence is $9,900.
IV.
Jerome cannot deduct a loss on Rental House A.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statement III is correct.
d.
Statements II and IV are correct.
e.
Statements III and IV are correct.
e
96. If a corporation incurs a net operating loss, what would cause it to elect to carry the loss forward and forsake the
carryback? Explain.
the present value of foregoing the refund (i.e., time value of money) in the current period.
97. Tyrone is the president of JWH Manufacturing and owns 30% of its stock. JWH is organized as an S corporation.
During 2015, JWH has a loss of $240,000. At the beginning of 2015, Tyrone’s amount at-risk in JWH is $60,000.
a.
What is Tyrone’ deductible loss in 2015? What is Tyrone’s at-risk amount at the end of 2015?
b.
In 2016, JWH has a taxable income of $100,000. What is the effect on Tyrone’s 2016 income?
What is Tyrone’s at-risk amount at the end of 2016?
loss in excess of his at-risk amount in JWH. Therefore, his 2014 loss deduction is limited to
98. Why did Congress enact the at-risk rules?
99. Ronald is exploring whether to open a franchise of Quick Tax. He plans on forming an S corporation and investing
$15,000 of his own money while borrowing $45,000 from the bank to finance the purchase of the necessary computing
equipment and software. The bank has proposed two financing options. Under the first option, the interest rate is only
10%, but the loan is recourse. The second option increases the interest rate to 15%, but the loan is nonrecourse.
a.
Discuss the tax and non-tax aspects of the two options.
b.
If Ronald incurs a $20,000 loss in the first year of operations, how much, if any, of the
loss can he deduct if the loan is recourse? Nonrecourse?
100. Discuss the difference(s) between the real estate professional exception and the active participation exception when
dealing with rental properties.
101. Classify and briefly explain the proper classification for each of the income-generating activities below. The
classifications are either, “active,” “passive,” or “portfolio.”
a.
Ford Motor Company Bond interest.
b.
Commissions earned from insurance sales.
c.
Sale of Microsoft common stock held as an investment.
d.
Income from a limited partnership investment.
e.
Rental income from an apartment building and the individual owner does not qualify as a real
estate professional.
f.
Gain from the sale of rental real estate and the individual owner does not qualify as a real estate
professional.
a.
Portfolio income. Derived from securities.
b.
Active income. Materially involved in earning the revenue.
c.
Portfolio income. The sale of the asset has the same classification as the income from the asset.
d.
Passive income. Limited partnerships are passive by definition.
e.
Passive income. Rents are passive unless the individual owner qualifies as a real estate
professional.
102. A taxpayer has the following income (losses) for the current year:
Active Income
Portfolio Income
Passive Income
$98,000
$22,000
$(30,000)
What is the taxable income (loss) of the taxpayer if:
a.
The taxpayer is a publicly held corporation?
b.
The taxpayer is a closely held corporation?
c.
The taxpayer is an individual and the passive income is not from a rental activity?
d.
The taxpayer is an individual and the passive income is the result of a rental activity for
which the taxpayer qualifies as a real estate professional.
e.
The taxpayer is an individual and the passive income is the result of a rental activity for
which the taxpayer fails to qualify as a real estate professional but meets the active
income.
Chapter 7
participation test?
a.
Publicly held corporations are not subject to the passive activity loss rules. The taxpayer
individual taxpayer has taxable income of $120,000 ($98,000 + $22,000) and a suspended
103. Maryanne is the senior chef for Bistro 501 Restaurant. Discuss whether the following losses are affected by the
passive activity rules.
a.
Maryanne has a $4,500 loss from her ownership interest in a catfish-farm limited partnership.
Maryanne is a limited partner.
b.
Maryanne has a $7,000 loss from her ownership interest in a feeder-lamb limited partnership.
Maryanne is a general partner and is responsible for day-to-day management decisions.
c.
Maryanne has a $11,000 loss from her ownership of a low-income housing project.
d.
Maryanne owns a rental house across the street from North Forest College and actively
participates in managing the rental property. The rental property generates a loss of $5,000 for
the current year.
a.
A limited partnership interest is passive by definition. Therefore, the loss can only be used to
she functions in this capacity over 500 hours in the current tax year, the loss is not passive.
limitation rules. These losses can be deducted from active or portfolio income.
104. Erline begins investing in various activities during the current year. Unfortunately, her tax advisor fails to warn her
about the passive loss rules. The results of the three passive activities she purchased for the current year are:
Income (Loss)
Chapter 7
Passive Activity 1
$(36,000)
Passive Activity 2
22,000
Passive Activity 3
(4,000)
a.
If Erline’s adjusted gross income is $170,000 before
considering the effect of the passive activities, what will
Erline’s adjusted gross income be for the current year? Fully
explain the effect of the passive activity investments on her
adjusted gross income.
b.
Because Passive Activity 1 has been such a loser, Erline is
considering selling it. However, she is concerned about the
effect of the sale on her taxable income because her tax
advisor told her that her basis in the activity is only $14,000
and she could sell it for $32,000. Explain the effect on her
taxable income if she sells Activity 1 for $32,000.
Erline’s adjusted gross income will be $170,000. Erline will include the $22,000 of income
activities 1 and 3. The $18,000 ($22,000 – $36,000 – $4,000) net passive loss is suspended and
Erline will realize a capital gain of $18,000 ($32,000 – $14,000) from the sale of passive
$40,000)] suspended loss on the activity. Therefore, her taxable income will only increase by
105. Brent is single and owns a passive activity that has a basis of $25,000 and a suspended passive loss of $8,000. He
acquired the passive activity in 2010. Brent’s taxable income from active and portfolio income is $85,000, and he has no
other capital gains or losses for the year.
a.
What is the effect on Brent’s taxable income if he sells the passive activity for $42,000?
b.
What is the effect on Brent’s taxable income if he sells the passive activity for $13,000?
c.
What is the effect on Brent’s taxable income if he dies this year while the fair market value of
the passive activity is $30,000?
d.
What is the effect on Brent’s taxable income if he dies this year while the fair market value of
the passive activity is $18,000?
e.
What is the effect on Brent’s taxable income if he gives the passive activity to his brother Norm
when the fair market value of the passive activity is $30,000?
However, the $17,000 capital gain is taxed at either 15% or 20%. As a result, $17,000 of his
$94,000 taxable income is taxed at 15% or 20%.
106. For each of the following situations, determine whether the item is deductible, and discuss any limitations, which
might be placed on the deduction.
a.
Carl owns an office building that he rents out to various businesses. During the current year,
rental income from the building is $95,000. Carl’s allowable expenses relating to the office
building are $150,000.
b.
Edward sells stock to an unrelated party at a $70,000 loss during the current year.
c.
Lee sold furniture at a loss of $5,000 during the current year.
$20,000 difference ($70,000 – $50,000), assuming he is a single taxpayer, is treated as a capital
107. For each of the following situations, determine whether the item is deductible, and discuss any limitations that might
resulting in an excess of $3,000. Therefore, Brent is allowed a deduction of $3,000. As a result,
Norm currently receives a deduction for the $8,000 suspended loss. This treatment prevents
taxable income is $85,000.
Chapter 7
be placed on the deduction.
Rioters damage Margarita’s business building, which has an adjusted basis of $50,000, during the current year.
a.
Assume the building is totally destroyed. The cost of replacing the building is estimated to be
$55,000. Margarita’s insurance reimburses her $32,000.
b.
Assume the building is severely damaged. Before the riot, the building is worth $55,000. The
insurance adjuster estimates the value of the building after the damage at $20,000. Margarita’s
insurance reimbursed her $32,000.
108. During the year Wilbur has the following capital gains and losses:
Short-term capital gains
$4,500
Short-term capital losses
(6,000)
Long-term capital gains
4,200
Long-term capital losses
(7,500)
What is the effect of the capital gains and losses on Wilbur’s taxable income?
Capital loss deduction
Capital loss carryforward
109. The Corinth Corporation is incorporated in 2012 and had no capital asset transactions during the year. From 2012
through 2015, the company had the following capital gains and losses:
2012
2013
2014
2015
Capital Gains
$18,000
$12,000
$20,000
$21,000
Capital Losses
(7,000)
(16,000)
(26,000)
(31,000)
If Corinth’s marginal tax rate during each of these years is 34%, what is the effect of Corinth’s capital gains and losses on
the amount of tax due each year?
2015
110. Fowler sells stock he had purchased for $22,000 to his brother, Phil, for $15,000. What is the tax consequence of the
sale to Fowler and Phil? Explain the three possible tax consequences if Phil sells the stock two years later to his neighbor?
111. Gloria owns 750 shares of the Greene Company that she acquired in 2008 for $9,000. On June 12 of the current year,
she sells 500 shares of Greene for $4,000. Two weeks later on June 26, Gloria purchases 200 shares of Greene for $2,200.
What are the effects of the June 12 sale? Explain.
112. Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain?
113. Hubert and Jared are both involved in automobile accidents, which totally destroy their automobiles this year. Hubert
and Jared purchased the automobiles at the same time for the same cost, and neither of them receives any insurance
reimbursement for the destruction of their automobiles. Before considering the effect of their casualties, Hubert and Jared
have identical adjusted gross incomes. Although Hubert and Jared are seemingly alike in every aspect regarding the
automobiles, Hubert is allowed a deduction of $2,000 for the destruction of his automobile and Jared is not allowed any
deduction for his automobile. What causes this disparity of treatments between Hubert and Jared? Explain. Use examples
if necessary.
carried back to 2012 and results in a $2,040 ($6,000 × 34%) refund. In 2015, $1,000 of the $10,000 loss is
Chapter 7
loss, while Hubert would receive a full $2,000 deduction.
Match each statement with the correct term below.
a.
Limited to $3,000 annually for individuals.
b.
When an asset is disposed of for less than its basis.
c.
An excess of business deductions over business income.
d.
A trade or business in which the taxpayer is not a material participant.
e.
A loss that results from some sudden, unexpected, or unusual event.
f.
Any asset that is not a receivable, inventory, or depreciable or real property used in a trade or business.
114. Capital asset
115. Capital loss
116. Casualty loss
117. Net operating loss
118. Passive activity
119. Transaction loss
Match each statement with the correct term below.
a.
A loss that is generally not deductible.
b.
The borrower is personally liable for the debt.
c.
The loss is used to offset income in future periods.
d.
A liability that is only secured by the underlying property.
e.
The loss may be used to offset income from prior periods.
f.
A type of stock that receives some ordinary loss treatment.
g.
Involved in a rental activity for more than 500 hours in a year.
h.
Cash or other assets contributed plus recourse debts of the activity.
i.
Owns at least a 10% interest and is significantly involved in the rental activity.
j.
The amount of the loss for fully destroyed property is the property’s adjusted basis.
k.
The amount of loss is limited to the lower of the property’s adjusted basis, or the reduction in fair market value.
l.
Management is left to at least one general partner whose liability is not limited and who is responsible for the on–
going activities of the business.
120. Active participant
Chapter 7
121. At-risk amount
122. Business casualty loss
123. Limited partnership
124. Material participant
125. NOL carryback
126. NOL carryforward
127. Nonrecourse debt
128. Personal casualty loss
129. Personal-use loss
130. Recourse debt
131. Small business stock