Question: On a taxable disposition of a passive

> Sally owns real property for which the annual property taxes are $9,000. She sells the property to Kate on March 9, 2017, for $550,000. Kate pays the real property taxes for the entire year on October 1, 2017. a. How much of the property taxes can be ded

> On August 31, 2016, Harvey and Margaret, who file a joint return and live in Charleston, South Carolina, sell their personal residence, which they have owned and lived in for 10 years. The realized gain of $292,000 was excluded under § 121. They purchase

> Gary, who is single, sells his principal residence (owned and occupied by him for seven years) in November 2017 for a realized gain of $148,000. He had purchased a more expensive new residence eight months prior to the sale. He anticipates that he will o

> On February 24, 2017, Allison’s building, with an adjusted basis of $1.3 million (and used in her trade or business), is destroyed by fire. On March 31, 2017, she receives an insurance reimbursement of $1.65 million for the loss. Allison invests $1.55 mi

> On June 5, 2017, Brown, Inc., a calendar year taxpayer, receives cash of $750,000 from the county upon condemnation of its warehouse building (adjusted basis of $500,000 and fair market value of $750,000). a. What must Brown do to qualify for § 1033 post

> Emily has $100,000 that she wants to invest and is considering the following two options: • Option A: Investment in Redbird Mutual Fund, which is expected to produce interest income of $8,000 per year. • Option B: Investment in Cardinal Limited Partnersh

> Tanya Fletcher owns undeveloped land (adjusted basis of $80,000 and fair market value of $92,000) on the East Coast. On January 4, 2017, she exchanges it with Lisa Martin (an unrelated party) for undeveloped land on the West Coast and $3,000 cash. Lisa h

> A number of years ago, Kay acquired an interest in a partnership in which she is not a material participant. Kay’s basis in her partnership interest at the beginning of 2016 is $40,000. Kay’s share of the partnership loss is $35,000 in 2016, while her sh

> Dorothy acquired a 100% interest in two passive activities: Activity A in January 2012 and Activity B in 2013. Through 2015, Activity A was profitable, but it produced losses of $200,000 in 2016 and $100,000 in 2017. Dorothy has passive activity income f

> Jay sold three items of business equipment for a total of $300,000. None of the equipment was appraised to determine its value. Jay’s cost and adjusted basis for the assets are shown below. Jay has been unable to establish the fair ma

> Logan and Johnathan exchange land, and the exchange qualifies as like kind under § 1031. Because Logan’s land (adjusted basis of $85,000) is worth $100,000 and Johnathan’s land has a fair market value of $80,000, Johnathan also gives Logan cash of $20,00

> Heather wants to invest $40,000 in a relatively safe venture and has discovered two alternatives that would produce the following reportable ordinary income and loss over the next three years: She is interested in the after-tax effects of these alterna

> In the current year, Abe gives an interest in a passive activity to his daughter, Andrea. The value of the interest at the date of the gift is $25,000, and its adjusted basis to Abe is $13,000. During the time that Abe owned the investment, losses of $3,

> At death, Francine owns an interest in a passive activity property (adjusted basis of $160,000, suspended losses of $16,000, and fair market value of $170,000). What is deductible on Francine’s final income tax return?

> Ella has $105,000 of losses from a real estate rental activity in which she actively participates. She has other rental income of $25,000 and other passive activity income of $32,000. Her AGI before considering these items of income and loss is $95,000.

> Ida, who has AGI of $80,000 before considering rental activities, is active in three separate real estate rental activities and is in the 28% tax bracket. She has $12,000 of losses from Activity A, $18,000 of losses from Activity B, and income of $10,000

> During the current year, Gene, a CPA, performs services as follows: 1,800 hours in his tax practice and 50 hours in an apartment leasing operation in which he has a 15% interest. Because of his oversight duties, Gene is considered to be an active partici

> Mary and Charles have owned a beach cottage on the New Jersey shore for several years and have always used it as a family retreat. When they acquired the property, they had no intentions of renting it. Because family circumstances have changed, they are

> Santiago and Amy are married and file a joint tax return, claiming as dependents their three children, ages 12, 14, and 18. Their AGI is $140,000. Determine the amount of the couple’s child tax credit.

> Bonnie and Jake (ages 35 and 36, respectively) are married with no dependents and live in Montana (not a community property state). Because Jake has large medical expenses, they seek your advice about filing separately to save taxes. Their income and exp

> Tim and Sarah Lawrence are married and file a joint return. Tim’s Social Security number is 123-45-6789, and Sarah’s Social Security number is 111-11-1112. They reside at 100 Olive Lane, Covington, LA 70434. They have two dependent children, Sean and Deb

> This year Maria works 1,200 hours as a computer consultant, 320 hours in a real estate development business, and 400 hours in real estate rental activities. Juan, her husband, works 250 hours in the real estate development business and 180 hours in the r

> Several years ago Benny Jackson (125 Hill Street, Charleston, WV 25311) acquired an apartment building that currently generates a loss of $60,000. Benny’s AGI is $130,000 before considering the loss. The apartment building is in an exclusive part of the

> Sue exchanges a sport-utility vehicle (adjusted basis of $16,000; fair market value of $19,500) for cash of $2,000 and a pickup truck (fair market value of $17,500). Both vehicles are for business use. Sue believes that her basis for the truck is $17,500

> Ray acquired an activity several years ago, and in the current year, it generates a loss of $50,000. Ray has AGI of $140,000 before considering the loss from the activity. If the activity is a bakery and Ray is not a material participant, what is his AGI

> Five years ago Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2016, his amount at risk in the activity was $30,000. His shares of the income and losses were as follows: Year………….…………Income (Loss) 2016………………………

> Mason Gregg’s car was destroyed by a flood. Unfortunately, his insurance had lapsed two days before he incurred the loss. Mason uses his car for both business and personal use. Mason, who is self-employed, does not have adequate savings to replace the ca

> Jonathan, a physician, earns $200,000 from his practice. He also receives $18,000 in dividends and interest from various portfolio investments. During the year, he pays $45,000 to acquire a 20% interest in a partnership that produces a $300,000 loss. Com

> Grace acquired an activity four years ago. The loss from the activity is $50,000 in the current year (at-risk basis of $40,000 as of the beginning of the year). Without considering the loss from the activity, she has gross income of $140,000. If the acti

> A number of years ago, Lee acquired a 20% interest in the BlueSky Partnership for $60,000. The partnership was profitable through 2016, and Lee’s amount at risk in the partnership interest was $120,000 at the beginning of 2017. BlueSky incurred a loss of

> Kareem owns a pickup truck that he uses exclusively in his business. The adjusted basis is $22,000, and the fair market value is $14,000. Kareem exchanges the truck for another truck that he will use exclusively in his business. a. What are Kareem’s real

> Jasmine owned rental real estate that she sold to her tenant in an installment sale. Jasmine acquired the property in 2005 for $400,000; took $178,000 of depreciation on it; and sold it for $210,000, receiving $25,000 immediately and the balance (plus in

> If depreciable equipment used in a business is sold at a recognized gain on July 10, 2017, and it was purchased on August 21, 2016, does § 1245 depreciation recapture apply to the asset? Explain.

> The end of the year is approaching, and Maxine has begun to focus on ways of minimizing her income tax liability. Several years ago she purchased an investment in Teal Limited Partnership, which is subject to the at-risk and the passive activity loss rul

> Kristin Graf (123 Baskerville Mill Road, Jamison, PA 18929) is trying to decide how to invest a $10,000 inheritance. One option is to make an additional investment in Rocky Road Excursions in which she has an at-risk basis of $0, suspended losses under t

> In the current year, White, Inc., earns $400,000 from operations and receives $36,000 of interest income from various portfolio investments. White also pays $150,000 to acquire a 20% interest in a passive activity that produces a $200,000 loss. a. Assumi

> Kim owns an interest in an activity that produces $100,000 of income during the year. Would Kim prefer to have the activity classified as active or passive? Discuss.

> Carlos owns an interest in an activity that produces a $100,000 loss during the year. Would he prefer to have the activity classified as active or passive? Explain.

> Arianna’s personal residence has an adjusted basis of $230,000 and a fair market value of $210,000. Arianna converts the personal residence to rental property. What is Arianna’s gain basis? What is her loss basis?

> Caroline owns a real estate rental activity that produces a loss of $65,000 during the current year. Under what circumstances can Caroline treat the entire loss as nonpassive?

> Sean, a limited partner in Ivy Nursery, is informed that his portion of the entity’s current loss is $18,000. As a limited partner, can Sean assume that his share of the partnership loss is a passive activity loss? Explain.

> Diane owns a principal residence in Georgia, a townhouse in San Francisco, and a yacht in Cape Cod. All of the properties have mortgages on which Diane pays interest. What are the limitations on Diane’s mortgage interest deduction? What strategy should D

> John, an engineer, operates a separate business that he acquired eight years ago. If he participates 85 hours in the business and it incurs a loss of $34,000, under what circumstances can John claim an active loss?

> Tan Corporation purchased depreciable tangible personal property for $100,000 in 2015 and immediately expensed the entire cost under § 179. In 2017, when the property was worth $80,000, Tan distributed it as a dividend to the corporation’s sole sharehold

> Katrina owns undeveloped land with an adjusted basis of $300,000. She exchanges it for other undeveloped land worth $750,000. a. What are Katrina’s realized and recognized gain or loss? b. What is Katrina’s basis in the undeveloped land she receives? c.

> How many hours must a participant work in a nonrental activity to be guaranteed material participation status?

> Bronze Corporation has $100,000 of active income, $55,000 of portfolio income, and a $55,000 passive activity loss. Under what circumstances is Bronze prohibited from deducting the loss? Allowed to deduct the loss?

> Discuss what constitutes a passive activity.

> Discuss whether the passive activity loss rules apply to the following: individuals, closely held C corporations, S corporations, partnerships, and personal service corporations.

> Explain the meaning of the terms active income, portfolio income, and passive activity income.

> Lisa sells business property with an adjusted basis of $130,000 to her son, Alfred, for its fair market value of $100,000. a. What is Lisa’s realized and recognized gain or loss? b. What is Alfred’s recognized gain or loss if he subsequently sells the pr

> Roberto invested $18,000 in a chicken production operation. Using nonrecourse notes, the business purchases $120,000 worth of grain to feed the chickens. If Roberto’s share of the expense is $26,000, how much can he deduct?

> List some events that increase or decrease an investor’s at-risk amount. What are some strategies that a taxpayer can employ to increase the at-risk amount to claim a higher deduction for losses?

> Dedriea contributes to her wholly owned corporation some tangible personal property she had used in her sole proprietorship business and depreciated. She had acquired the property for $566,000 and had taken $431,000 of depreciation on it before contribut

> Identify two rules designed to limit the tax benefits a taxpayer may obtain from a tax shelter investment. Describe how these rules reduce or defer the recognition of tax losses.

> Surendra’s personal residence originally cost $340,000 (ignore land). After living in the house for five years, he converts it to rental property. At the date of conversion, the fair market value of the house is $320,000. As to the rental property, calcu

> Jacob, a self-employed taxpayer, is married and has two children. He has asked you to explain the tax and nontax advantages of creating a Health Savings Account (HSA) for him and his family.

> What is investment interest expense? Describe the basic rules that may limit its deductibility.

> In connection with passive activities, what is a deduction equivalent and how is it computed?

> Brad owns a small townhouse complex that generates a loss during the year. Under what circumstances can Brad deduct a loss from the rental activity? What limitations apply?

> Since his college days, Charles has developed an entrepreneurial streak. After working in his family’s grocery business, he starts several ventures on his own. Even though Charles is independently wealthy, he is looking forward to working in each of the

> What is a real estate professional? Why could qualifying for this status be beneficial under the passive activity loss rules?

> How is passive activity defined in the Code? What aspects of the definition have been clarified by final or Temporary Regulations?

> Tabitha sells real estate on March 2 for $260,000. The buyer, Ramona, pays the real estate taxes of $5,200 for the calendar year, which is the real estate property tax year. Assume that this is not a leap year. a. Determine the real estate taxes apportio

> David contributes to charity some tangible personal property that he had used in his business and depreciated. At the date of the donation, the property has a fair market value of $233,000 and an adjusted basis of zero; it was originally acquired for $40

> Explain why some rental activities may not be treated as such under the passive activity loss rules.

> Last year Alan’s accountant informed him that he could not claim any of his passive activity losses on his income tax return because of his lack of material participation. To circumvent the tax problem this year, Alan tells his wife that she may have to

> David, a sole proprietor of a bookstore, pays a $7,500 premium for medical insurance for him and his family. Joan, an employee of a small firm that doesn’t provide her with medical insurance, pays medical insurance premiums of $8,000 for herself. How doe

> Emerald Corporation is required to change its method of accounting for Federal income tax purposes. The change will require an adjustment to income to be made over three tax periods. Jonas, the sole shareholder of Emerald Corporation, wants to better und

> Kenny Merinoff and his son, John, own all of the outstanding stock of Flamingo Corporation. Both John and Kenny are officers in the corporation and, together with John’s uncle, Ira, comprise the entire board of directors. Flamingo uses the cash method of

> Your firm has a new individual client, Carla Navarro, who has been assigned to you for preparation of the current year’s tax return. Upon review of Carla’s tax returns from prior years, you notice that she reported a large capital gain from a stock redem

> In November of the current year, Emerald Corporation declared a dividend of $2 per share (the shareholder record date is December 15). Assume that Emerald has sufficient current E & P to cover the dividend payment. If Judy purchases 500 shares of Emerald

> Lime Corporation, with E & P of $500,000, distributes land (worth $300,000, adjusted basis of $350,000) to Harry, its sole shareholder. The land is subject to a liability of $120,000, which Harry assumes. What are the tax consequences to Lime and to Harr

> Heather, an individual, owns all of the outstanding stock in Silver Corporation. Heather purchased her stock in Silver nine years ago, and her basis is $56,000. At the beginning of this year, the corporation has $76,000 of accumulated E & P and no curren

> Larry, the sole shareholder of Brown Corporation, sold his Brown stock to Ed on July 30 for $270,000. Larry’s basis in the stock was $200,000 at the beginning of the year. Brown had accumulated E & P of $120,000 on January 1 and has current E & P of $240

> Miguel receives tangible personal property as an inheritance in 2015. The property was depreciated by the deceased (Miguel’s father), and Miguel will also depreciate it. At the date of the deceased’s death, the property was worth $532,000. The deceased h

> Complete the following schedule for each case. Unless otherwise indicated, assume that the shareholders have ample basis in the stock investment. Cash Acaumulated Distributions E& P Beginning of Year (All on Last Day of Year) Divi dend Return of Cur

> During a recent Sunday afternoon excursion, Miriam, an admirer of early twentieth-century architecture, discovers a 1920s-era house in the countryside outside Mobile, Alabama. She wants to purchase and renovate this house, and to move the structure into

> Black Corporation and Tom each own 50% of Tan Corporation’s common stock. On January 1, Tan has a deficit in accumulated E & P of $200,000. Its current E & P is $90,000. During the year, Tan makes cash distributions of $40,000 each to Black and Tom. a. H

> Abby’s home had a basis of $360,000 ($160,000 attributable to the land) and a fair market value of $340,000 ($155,000 attributable to the land) when she converted 70% of it to business use by opening a bed-and-breakfast. Four years after the conversion,

> In each of the following independent situations, indicate the effect on taxable income and E & P, stating the amount of any increase (or decrease) in each as a result of the transaction. Assume that E & P has already been increased by taxable inc

> Some types of work are counted in applying the material participation standards, and some types are not counted. Discuss and give examples of each type.

> Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following transactions in 2017, its second year of operation. Taxable income………………………………………………………………………………..…..$330,000 Federal income tax liability paid……………………………………………………………….112,0

> On September 30, Silver Corporation, a calendar year taxpayer, sold a parcel of land (basis of $400,000) for a $1 million note. The note is payable in five installments, with the first payment due next year. Because Silver did not elect out of the instal

> Cardinal Corporation, a calendar year taxpayer, receives dividend income of $250,000 from a corporation in which it holds a 10% interest. Cardinal also receives interest income of $35,000 from municipal bonds. (The municipality used the proceeds from the

> At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $100,000. Blue’s current E & P is $60,000, and at the end of the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon.

> Mitchell, a calendar year taxpayer, is the sole proprietor of a fast-food restaurant. His adjusted basis for the building and the related land is $450,000. On March 12, 2017, state authorities notify Mitchell that his property is going to be condemned so

> Crane Corporation has 2,000 shares of stock outstanding. It redeems 500 shares for $370,000 when it has paid-in capital of $300,000 and E & P of $1.2 million. The redemption qualifies for sale or exchange treatment for the shareholder. Crane incurred $13

> Broadbill Corporation (E & P of $650,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals: Tammy, 300 shares; Yvette, 400 shares; and Jeremy, 300 shares. Each of the shareholders paid $50 per share for the

> The gross estate of Raul, decedent, includes stock in Iris Corporation (E & P of $3 million) valued at $2.5 million. At the time of his death, Raul owned 60% of the Iris stock outstanding, and he had a basis of $420,000 in the stock. The death taxes and

> Ashby and Curtis, married professionals, have a 2-year-old son, Jason. Curtis works full-time as an electrical engineer, but Ashby has not worked outside the home since Jason was born. As Jason is getting older, Ashby thinks that Jason would benefit from

> Tyneka inherited 1,000 shares of Aqua, Inc. stock from Joe. Joe’s basis was $35,000, and the fair market value on July 1, 2017 (the date of death) was $45,000. The shares were distributed to Tyneka on July 15, 2017. Tyneka sold the stock on July 30, 2018

> Wanda is considering selling two personal use assets that she owns. One has appreciated in value by $20,000, and the other has declined in value by $17,000. Wanda believes that she should sell both assets in the same tax year so that the loss of $17,000

> Robert and Lori (Robert’s sister) own all of the stock in Swan Corporation (E & P of $1 million). Each owns 500 shares and has a basis of $85,000 in the shares. Robert wants to sell his stock for $600,000, the fair market value, but he will continue to b

> Cyan Corporation (E & P of $700,000) has 4,000 shares of common stock outstanding. The shares are owned as follows: Angelica, 2,000 shares; Dean (Angelica’s son), 1,500 shares; and Walter (Angelica’s uncle), 500 shares. In the current year, Cyan redeems

> Stork Corporation (E & P of $850,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals: Lana Johnson, 400 shares; Lori Jones (Lana’s mother), 200 shares; and Leo Jones (Lana’s brother), 400 shares. Lana paid

> Rita retired from public accounting after a long and successful career of 45 years. As part of her retirement package, she continues to share in the profits and losses of the firm, albeit at a lower rate than when she was working fulltime. Because Rita w

> Alicia sold her personal residence to Rick on June 30 for $300,000. Before the sale, Alicia paid the real estate tax of $4,380 for the calendar year. For income tax purposes, the deduction is apportioned as follows: $2,160 to Alicia and $2,220 to Rick. W

> Jayden, a calendar year taxpayer, paid $16,000 in medical expenses and sustained a $20,000 casualty loss in 2017. He expects $12,000 of the medical expenses and $14,000 of the casualty loss to be reimbursed by insurance companies in 2018. Before consider

> Shonda owns 1,000 of the 1,500 shares outstanding in Rook Corporation (E & P of $1 million). Shonda paid $50 per share for the stock seven years ago. The remaining stock in Rook is owned by unrelated individuals. What are the tax consequences to Shonda i