Question

Answer all 1-6 questions and show work;

1. 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:

a. $60,000 total gain; $105,000 taxable gain.

b. $10,000 total gain; $15,000 taxable gain.

c. $60,000 total gain; $0 taxable gain.

d. $60,000 total gain; $15,000 taxable gain.

e. None of the above.

2. 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) in (Thousands) :

Activity A	​($60K
Activity B	​(40K
Activity C	​ 75K
Net passive loss	​($25K

Matt’s suspended losses are as follows:

a. $25,000 is allocated to C; $0 to A and B.

b. $12,500 is allocated to A; $12,500 to B.

c. $15,000 is allocated to A; $10,000 to B.

d. $8,333 is allocated to A, B, and C.

e. None of the above.

3. Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?

a. The similarities and differences in types of business.

b. The extent of common control.

c. The extent of common ownership.

d. The geographic location.

e. All of the above.

4. Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E.

a. All five of Dena’s activities are significant participation activities.

b. Dena is a material participant with respect to all five activities.

c. Dena is not a material participant in any of the activities.

d. Dena is a material participant with respect to Activities B, C, D, and E.

e. None of the above.

5. Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for the last 20 years. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. However, she continues to be a material participant in a retail store in which she is a 50% partner. The restaurant operations produce a loss for the current year, and Maria’s share of the loss is $80,000. Her share of the income from the retail store is $150,000. She does not own interests in any other activities.

a. Maria cannot deduct the $80,000 loss from the restaurant because she is not a material participant.

b. Maria can offset the $80,000 loss against the $150,000 of income from the retail store.

c. Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years.

d. Assuming Maria continues to hold the interest in the restaurant, she will always treat the losses as active.

e. None of the above.

6. Jenny spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that she owns at a resort community. She also owns a music store in another city that is operated by a full-time employee. Jenny spends 140 hours per year working at the music store. She elects not to group them together as a single activity under the “appropriate economic unit” standard.

a. Neither store is a passive activity.

b. Both stores are passive activities.

c. Only the bicycle rental store is a passive activity.

d. Only the music store is a passive activity.

e. None of the above.

Answer 1

Question	Answers	Rationale
1	. $60,000 total gain; $15,000 taxable gain	$105,000 amount realized - $45,000 adjusted basis = $60,000 total gain - $45,000 suspended loss =$15,000 taxable gain.
2	$15,000 is allocated to A; $10,000 to B	$60,000/$100,000 × $25,000 = $15,000 allocated to Activity A
		$40,000/$100,000 × $25,000 = $10,000 allocated to Activity B
3	All of the above
4	Dena is a material participant with respect to Activities B, C, D, and E.	Dena for Activity A does not participate for more than 100 hours. She is not a material participant with respect to Activity A because this activity is not a significant participation activity.As per the Significant participation test Dena is a material participant in Activities B, C, D, and E.
5	Maria can offset the $80,000 loss against the $150,000 of income from the retail store.	Maria loss is an active loss that can be offset against her active income from the retail store because Maria materially participated in the restaurant activity for at least five of the last ten taxable years before the current year
6	Neither store is a passive activity.	A bicycle rental store is not treated as a rental activity because the average period of customer use is 7 days or less. Because Jenny participates for more than 500 hours during the year, the bicycle rental store is treated as an active business. Jenny participates for more than 100 hours in the music store, which makes it a significant participation activity. Her total participation in the two significant participation activities is more than 500 hours, so neither business is treated as passive.