South-Western Federal Taxation 2017 Comprehensive, 40th Edition By William H. Hoffman – Test Bank

1. Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year. During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations. Jack’s at-risk amount at the end of the year is $44,000.
a. True
b. False
ANSWER: False
RATIONALE: The amount a taxpayer has at risk is increased by the taxpayer’s share of additional recourse debt and decreased by the share of losses from the activity. The at-risk amount is not affected by nonrecourse debt. Jack’s year-end at-risk amount is $36,000 [$42,000 – (10% × $60,000 loss)].
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-02 – LO: 11-02
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.

2. Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.
a. True
b. False
ANSWER: False
RATIONALE: The at-risk provisions limit the deductibility of losses from business and income-producing activities for individuals and closely held corporations. The loss reduces Sherri’s at-risk amount to $0 and results in a suspended loss of $12,000 under the at-risk rules.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-02 – LO: 11-02
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.

3. In the current year, Don has a $55,000 loss from a business he owns. His at-risk amount at the end of the year, prior to considering the current year loss, is $36,000. He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business.
a. True
b. False
ANSWER: False
RATIONALE: Don’s loss deduction will be limited to $36,000 by the at-risk rules.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-02 – LO: 11-02
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.

4. Judy owns a 20% interest in a partnership (not real estate) in which her at-risk amount was $35,000 at the beginning of the year. The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year. Her at-risk amount at the end of the year is $43,000.
a. True
b. False
ANSWER: False
RATIONALE: Judy is considered at-risk for amounts borrowed on a recourse note because she is personally liable for repayment of the debt. Therefore, her at-risk amount is increased by her share of the recourse debt incurred by the partnership. Judy’s at-risk amount at the end of the year is $53,000 [$35,000 + (20% × $50,000 recourse note) + (20% × $40,000 profit)].
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-02 – LO: 11-02
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.

5. Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing. Recapture of previously allowed losses is required if Tonya’s at-risk amount is reduced below zero as a result of the debt restructuring.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-02 – LO: 11-02
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Reporting
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.

6. Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible.
a. True
b. False
ANSWER: False
RATIONALE: A suspended passive loss may be deducted when the activity is sold, even if the sale of the activity results in a loss. The suspended loss can offset Kelly’s active income from her job.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-03 – LO: 11-03
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.

7. All of a taxpayer’s tax credits relating to a passive activity can be utilized when the activity is sold at a loss.
a. True
b. False
ANSWER: False
RATIONALE: Tax credits associated with a passive investment are lost if the investment is disposed of at a loss.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-03 – LO: 11-03
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Knowledge
OTHER: Time: 2 min.

8. Jackson Company incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Jackson is a personal service corporation, it may deduct $34,000 of the passive loss.
a. True
b. False
ANSWER: False
RATIONALE: The passive loss rules apply to individuals, estates, trusts, closely held C corporations, and personal service corporations. Therefore, Jackson, a personal service corporation, is not allowed to offset passive losses against active or portfolio income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-03 – LO: 11-03
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.

9. Oriole Corporation has active income of $45,000 and a passive 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. True
b. False
ANSWER: False
RATIONALE: Personal service corporations may not offset passive losses against active income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-03 – LO: 11-03
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 2 min.

10. Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Gray is not a personal service corporation, it may deduct $34,000 of the passive loss.
a. True
b. False
ANSWER: True
RATIONALE: The passive loss rules apply to individuals, estates, trusts, personal service corporations, and closely held C corporations. Only closely held C corporations that are not personal service corporations are allowed to offset passive losses against active income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CMPV.SWFT.LO: 11-03 – LO: 11-03
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA: FN-Measurement –
AICPA: FN-Measurement
KEYWORDS: Bloom’s: Comprehension
OTHER: Time: 5 min.