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Exam 6: Losses and Loss Limitations

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Question 71

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Two years ago, Gina loaned Tom $50,000.Tom signed a note the terms of which called for monthly payments of $2,000 plus 6% interest on the outstanding balance.Last year, when the balance owing on the loan was $18,000, Tom defaulted on the note.As of the end of last year, there appeared to be no reasonable prospect of Gina recovering the $18,000.As a consequence, Gina claimed the $18,000 as a nonbusiness bad debt.Last year, Gina had AGI of a negative $6,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends.Gina did not itemize her deductions.During the current year, Tom paid Gina $13,000 in final settlement of the loan.How should Gina account for the payment in the current year?

A) File an amended tax return for last year.
B) Report no income for the current year.
C) Report $8,000 of income for the current year.
D) Report $12,000 of income for the current year.
E) None of the above.

F) C) and D)
G) B) and C)

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Question 72

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The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer.

A) True
B) False

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Question 73

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Tom participates for 300 hours in Activity A and 250 hours in Activity B, both of which are nonrental businesses.Both activities are active.

Describe the types of activities and taxpayers that are subject to the at-risk rules.

Orange Corporation, a closely held (non-personal service) C corporation, earns active income of $300,000 in the current year.The corporation also receives $35,000 in dividends and incurs a loss of $50,000 from an investment in a passive activity.What is Orange's income for the year after considering the passive investment?

Paula owns four separate activities.She elects not to group them together as a single activity under the "appropriate economic unit" standard.Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours in Activity D.She has one employee, who works 125 hours in Activity D.Which of the following statements is correct?

Carl, a physician, earns $200,000 from his medical practice in the current year.He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity.In addition, he incurs a loss of $50,000 from an investment in a passive activity.What is Carl's AGI for the current year after considering the passive investment?

A loss is not allowed for a security that declines in value.

Nell sells a passive activity with an adjusted basis of $45,000 for $105,000.Suspended losses attributable to this property total $45,000.The total gain and the taxable gain are:

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2016.His loss from the activity in 2016 is $80,000, and he had no passive activity income during the year.Art had $20,000 of passive activity income from the activity in 2017.Under the passive activity loss rules, Art's suspended loss at the end of 2017 is:

Individuals can deduct from active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.

Joyce owns an activity (not real estate) in which she participates for 100 hours a year; her husband participates for 450 hours.Joyce qualifies as a material participant.

Sally is an employee of Blue Corporation.Last year, she purchased a very expensive computer with her own funds.She used the computer 100% for business purposes.During the current year, the computer was completely destroyed in a fire.Blue Corporation did not reimburse her for her loss.Discuss whether Sally's loss will create or increase Sally's net operating loss.

On February 20, 2016, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000.On May 1, 2017, the stock became worthless.During 2017, Bill also had an $8,000 loss on § 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain.How should Bill treat these items on his 2017 tax return?

In the current year, Lucile, who has AGI of $70,000 before considering rental activities, is active in three separate real estate rental activities and is in the 28% tax bracket.She had $15,000 of losses from Activity A, $25,000 of losses from Activity B, and income of $20,000 from Activity C.She also had $3,100 of tax credits from Activity A.Calculate her deductions and credits currently allowed and the suspended losses and credits.

Oriole Corporation has active income of $45,000 and a passive activity loss of $23,000 in the current year.Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation.

A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.

Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year.His current loss from the activity is $80,000.Vic had no passive activity income during the year.At the end of the current year:

Matt has three passive activities and has at-risk amounts in excess of $100,000 for each.During the year, the activities produced the following income (losses) . $\begin{array} { l r } \text { Activity A } & ( \$ 60,000 ) \\\text { Activity B } & ( 40,000 ) \\\text { Activity C } & 75,000 \\\text { Net passive activity loss } & ( \$ 25,000 ) \\\hline\end{array}$ ? Matt's suspended losses are as follows:

A loss from a worthless security is always treated as a short-term capital loss.