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tax problems - questin




Question;33. LO.2 In 2012, Fred invested $50,000 in a general partnership. Fred?s interest is not considered to be a passive activity. If his share of the partnership losses is $35,000 in 2012 and $25,000 in 2013, how much can he deduct in each year?34. LO.2 In the current year, Bill Parker (54 Oak Drive, St. Paul, MN 55164) is considering making an investment of $60,000 in Best Choice Partnership. The prospectus provided byBill?s broker indicates that the partnership investment is not a passive activity and that Bill?s share of the entity?s loss in the current year will likely be $40,000, while his share of the partnership loss next year will probably be $25,000. Write a letter to Bill in which you indicate how the losses would be treated for tax purposes in the current year and the following year.35. LO.2, 11 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:Year Alternative 1 Income (Loss) Alternative 2 Income (Loss)1 ($20,000) ($48,000)2 (28,000) 32,0003 72,000 40,000She is interested in the after-tax effects of these alternatives over a three-year horizon.Assume that Heather?s investment portfolio produces sufficient passive income to offset any potential passive loss that may arise from these alternatives, that her cost of capital is6% (the present value factors are.9434,.8900, and.8396), that she is in the 25% tax bracket, that each investment alternative possesses equal growth potential, and that each alternative exposes her to comparable financial risk. In addition, assume that in the loss years for each alternative, there is no cash flow from or to the investment (i.e., the loss is due to depreciation), while in those years when the income is positive, cash flows to Heather equal the amount of the income. Based on these facts, compute the present value of these two investment alternatives and determine which option Heather should choose.36. LO.1, 3 Dorothy acquired passive Activity A in January 2008 and Activity B in 2009.Through 2011, Activity A was profitable, but it produced losses of $200,000 in 2012 and $100,000 in 2013. Dorothy has passive income from Activity B of $20,000 in 2012 and $40,000 in 2013. After offsetting passive income, how much of the net losses may she deduct?37. LO.1, 3 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 of2012 is $40,000. Kay?s share of the partnership loss is $35,000 in 2012, while her share of the partnership income is $15,000 in 2013. How much may Kay deduct in 2012 and 2013?38. LO.3 Mike, an attorney, earns $200,000 from his law practice and receives $45,000 in dividends and interest during the year. In addition, he incurs a loss of $50,000 from an investment in a passive activity acquired three years ago. What is Mike?s net income for the current year after considering the passive investment?39. LO.3, 11 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 $8,000 per year.? Option B: Investment in Cardinal Limited Partnership (buys, sells, and operates wine vineyards). Emily?s share of the partnership?s ordinary income and loss over the next three years would be as follows:Year Income (Loss)1 ($ 8,000)2 (2,000)3 34,000Emily is interested in the after-tax effects of these alternatives over a three-year horizon.Assume that Emily?s investment portfolio produces ample passive income to offset any passive losses that may be generated. Her cost of capital is 8% (the present value factors are.92593,.85734, and.79383), and she is in the 28% tax bracket. The two investment alternatives possess equal growth potential and comparable financial risk. Based on these facts, compute the present value of these two investment alternatives and determine which option Emily should choose.40. LO.3 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?41. LO.3, 11 Jorge owns two passive investments, Activity A and Activity B. He plans to dispose of Activity A in the current year or next year. Juanita has offered to buy Activity A this year for an amount that would produce a taxable passive gain to Jorge of $115,000.However, if the sale, for whatever reason, is not made to Juanita, Jorge believes that he could find a buyer who would pay about $7,000 less than Juanita. Passive losses and gains generated (and expected to be generated) by Activity B follow:Two years ago ($35,000)Last year (35,000)This year (8,000)Next year (30,000)Future years Minimal profitsAll of Activity B?s losses are suspended. Should Jorge close the sale of Activity A with Juanita this year, or should he wait until next year and sell to another buyer? Jorge is in the28% tax bracket.42. LO.3 Sarah has investments in four passive activity partnerships purchased several years ago. Last year the income and losses were as follows:Activity Income (Loss)A $ 30,000B (30,000)C (15,000)D (5,000)In the current year, she sold her interest in Activity D for a $10,000 gain. Activity D, which had been profitable until last year, had a current loss of $1,500. How will the sale of Activity D affect Sarah?s taxable income in the current year?43. LO.3 Leon sells his interest in a passive activity for $100,000. Determine the tax effect of the sale based on each of the following independent facts:a. Adjusted basis in this investment is $35,000. Losses from prior years that were not deductible due to the passive loss restrictions total $40,000.b. Adjusted basis in this investment is $75,000. Losses from prior years that were not deductible due to the passive loss restrictions total $40,000.c. Adjusted basis in this investment is $75,000. Losses from prior years that were not deductible due to the passive loss restrictions total $40,000. In addition, suspended credits total $10,000.44. LO.3 Ash, Inc., a closely held personal service corporation, has $100,000 of passive losses. In addition, Ash has $80,000 of active business income and $20,000 of portfolio income. How much of the passive loss may Ash use to offset the other types of income?45. LO.3 In the current year, White, Inc., earns $400,000 from operations and receives $36,000 in dividends and interest on various portfolio investments. White also pays $150,000 to acquire a 20% interest in a passive activity that produces a $200,000 loss.a. Assuming that White is a personal service corporation, how will these transactions affect its taxable income?b. Same as (a), except that White is closely held but not a personal service corporation.46. LO.2, 3, 7, 11 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 the at-risk rules of $7,000, and suspended passive losses of $1,000. If Kristin makes this investment, her share of the expected profits this year will be $8,000. If her investment stays the same, her share of profits from Rocky Road Excursions will be $1,000.Another option is to invest $10,000 as a limited partner in the Ragged Mountain Winery, this investment will produce passive income of $9,000. Write a letter to Kristin to review the tax consequences of each alternative. Kristin is in the 28% tax bracket.47. LO.6 Last year Fred, a real estate developer, purchased 25 acres of farmland on the outskirts of town for $100,000. He expects that the land?s value will appreciate rapidly as the town expands in that direction. Since the property was recently reappraised at $115,000, some of the appreciation has already taken place. To enhance his return from the investment,Fred decides that he will begin leasing the land to a local farmer. He has determined that a fair rent would be at least $1,500 but no more than $3,500 per year. Fred also has an interest in a passive activity that generates an annual loss of $2,800. How do the passive loss rules affect Fred?s decision on how much rent to charge for the farmland?48. LO.2, 3, 7, 11 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 rules. (Last year Maxine sold a different investment that was subject to these rules but produced passive income.) She believes that her investment in Teal has good long-term economic prospects. However, it has been generating tax losses for several years in a row. In fact, when she was discussing last year?s income tax return with her tax accountant, he said that unless ?things change? with respect to her investments, she would not be able to deduct losses this year.a. What was the accountant referring to in his comment?b. You learn that Maxine?s current at-risk basis in her investment is $1,000 and that her share of the current loss is expected to be $13,000. Based on these facts, how will her loss be treated?c. After reviewing her situation, Maxine?s financial adviser suggests that she invest at least an additional $12,000 in Teal to ensure a full loss deduction in the current year.How do you react to his suggestion?d. What would you suggest Maxine consider as she attempts to maximize her currentyear deductible loss?="color:>


Paper#39487 | Written in 18-Jul-2015

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