Accounting 440 MCQ Quiz

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Accounting 440 MCQ Bank

1. Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk. If the business incurs a loss of $80,000 from operations, Stuart can deduct the full amount.

a. True

b. False

2. Stan owns a 20% interest in a partnership (not real estate) in which his at-risk amount was $38,000 at the beginning of the year. During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $50,000 from operations. Stan’s at-risk amount at the end of the year is $44,000.

a. True
b. False

3. In the current year, Rich has a $40,000 loss from a business he owns. His at-risk amount at the end of the year, prior to considering the current year loss, is $24,000. He will be allowed to deduct the $40,000 loss this year if he is a material participant in the business.

a. True
b. False

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

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

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

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

8. During the year, Lion Company incurs a $25,000 loss on a passive activity, has active income of $17,000, and portfolio income of $12,000.  If Lion is a personal service corporation, it may deduct $17,000 of the $25,000 passive loss.

a. True
b. False

9. Coyote Corporation has active income of $45,000 and a passive loss of $23,000 in the current year. Coyote cannot deduct the $23,000 loss if it is a personal service corporation.

a. True
b. False

10. Peach Company, a closely held C corporation, incurs a $58,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Peach is a not a personal service corporation, it may deduct the entire $58,000 passive loss.

a. True
b. False

11. Wolf Corporation has active income of $55,000 and a passive loss of $33,000 in the current year. Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

a. True
b. False

12. Nathan owns Activity A, which produces income, and Activity B, which produces passive losses.  From a tax planning perspective, Nathan will be better off if Activity A is passive.

a. True
b. False

13. Anita owns Activity A which produces active income and Activity B which produces losses.  From a tax planning perspective, Anita will be better off if Activity B is a passive activity.

a. True
b. False

14. David participates 580 hours in an activity during the year; others participate for 1,400 hours. David is a material participant in the activity.

a. True
b. False

15. Joe participates 95 hours in an activity, while an employee participates 5 hours. Joe has materially participated in the activity.

a. True
b. False

16. Mary Jane participates for 100 hours during the year in an activity she owns.  She has no employees and is the only participant in the activity.  The activity is a significant participation activity.

a. True
b. False

17. A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.

a. True
b. False

18. Rachel participates 150 hours in Activity A and 400 hours in Activity B, both of which are nonrental businesses. Both activities are passive.

a. True
b. False

19. Lucy participates for 405 hours in Activity A and 101 hours in Activity B, both of which are nonrental businesses. Both activities are passive.

a. True
b. False

20. From January through November, Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest. The partnership has four full-time employees. During December, Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards. Vern qualifies as a material participant.

a. True
b. False

21. 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.

a. True
b. False

22. When determining whether an individual is a material participant, participation by an owner’s spouse generally counts.

a. True
b. False

23. Kathy is a full-time educator, but she owns an apartment building and devotes 550 hours to managing the activity.  All losses from the rental activity will be considered nonpassive and deductible against active income because she is a real estate professional.

a. True
b. False

24. Bruce owns a small apartment building that produces a $25,000 loss during the year.  His AGI before considering the rental loss is $85,000.  Bruce must be an active participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception.

a. True
b. False

25. In the current year, Kenny has a $35,000 loss from a real estate rental activity. Kenny provides 1,000 hours of service to that activity, which is more than half of his working hours for the year. Kenny can deduct the $35,000 loss.

a. True
b. False

26. Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.

a. True
b. False

27. In the current year, Abby has AGI of $95,000 and a $40,000 loss from a real estate rental activity in which she is a 15% owner.  If she is an active participant, she can deduct $25,000 of the loss.

a. True
b. False

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

a. True
b. False

29. Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.

a. True
b. False

30. Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year. He has AGI of $150,000 from an active business. He may deduct $25,000 of the loss.

a. True
b. False

31. Bonnie owns and actively participates in the operations of an apartment building that produces a $40,000 loss during the year. In addition, she has AGI of $100,000 from an active business. Her at-risk amount in the apartment building is $200,000. She may deduct $25,000 of the loss in the current year, while the remaining $15,000 is a suspended passive loss.

a. True
b. False

32. Susan dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000. A $15,000 passive loss can be deducted on Susan’s final income tax return.

a. True
b. False

33. Chris receives a gift of a passive activity from his father whose basis was $60,000. Suspended losses related to the activity are $18,000. Chris will be allowed to offset the $18,000 suspended losses against future passive income.

a. True
b. False

34. Eric makes an installment sale of a passive activity having suspended losses of $40,000. He collects 25% of the sales price in the current year, and will collect 25% in each of the next three years. Eric can deduct $10,000 of the passive loss this year.

a. True
b. False

35. Gail exchanges passive Activity A, which has suspended losses of $15,000, for passive Activity B in a nontaxable exchange. The new owner of passive Activity A can offset the $15,000 suspended losses against passive income in the future.

a. True
b. False

36. Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during 2011.  He incurred other investment expenses of $7,000 during the year.  Jared may deduct $14,000 of investment interest in 2011.

a. True
b. False

37. Investment income can include gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business; income from a passive activity; and income from a real estate activity in which the taxpayer actively participates.

a. True
b. False

38. Seth had interest income of $31,000, investment expenses of $28,000, and  a long-term capital gain of $8,000 on an investment.  In calculating his net investment income, Seth may deduct a maximum of $11,000 investment interest.

a. True
b. False

39. Earl, who earned investment income of $13,500, incurred investment interest expense of $7,700, and other investment expenses of $9,000.  Earl may carry over $3,200 of investment interest and deduct it in the future.

a. True
b. False

40. In 2011, Judy invested $200,000 for a 25% interest in a limited liability company (LLC) involved in an activity in which she is a material participant.  The LLC reported losses of $680,000 in 2011 and $360,000 in 2012 with Judy’s share being $170,000 in 2011 and $90,000 in 2012.  How much of the losses can Judy deduct?

a. $0 in 2011; $0 in 2012.

b. $170,000 in 2011; $0 in 2012.

c. $170,000 in 2011; $30,000 in 2012.

d. $170,000 in 2011; $90,000 in 2012.

e. None of the above.

41. Which of the following decreases a taxpayer’s at-risk amount?

a. Cash and the adjusted basis of property contributed to the activity.

b. Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity.

c. Taxpayer’s share of amounts borrowed for use in the activity that is qualified nonrecourse financing.

d. Taxpayer’s share of the activity’s income.

e. None of the above.

42. In 2011, Pearl invests $80,000 for a 10% partnership interest in an activity in which she is a material participant. The partnership reports losses of $500,000 in 2011 and $450,000 in 2012. Pearl’s share of the partnership’s losses is $50,000 in 2011 and $45,000 in 2012. How much of the losses can Pearl deduct?

a. $50,000 in 2011 and $30,000 in 2012.

b. $50,000 in 2011 and $45,000 in 2012.

c. $0 in 2011 and $0 in 2012.

d. $50,000 in 2011 and $0 in 2012.

e. None of the above.

43. In 2011, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity.  The partnership reported losses of $200,000 in 2011 and $100,000 in 2012, Kipp’s share being $60,000 in 2011 and $30,000 in 2012.  How much of the losses from the partnership can Kipp deduct assuming he owns no other investments and does not participate in the partnership’s operations?

a. $0 in 2011; $30,000 in 2012.

b. $60,000 in 2011; $30,000 in 2012.

c. $60,000 in 2011; $5,000 in 2012.

d. $60,000 in 2011; $0 in 2012.

e. None of the above.

44. Nora acquired passive activity A several years ago that until 2010 was profitable. However, the activity produced losses of $100,000 in 2010 and $50,000 in 2011. Nora had passive income from activity B of $40,000 in 2010 and $0 in 2011. How much loss is suspended from activity A in each year?

a. $60,000 in 2010 and $50,000 in 2011.

b. $100,000 in 2010 and $50,000 in 2011.

c. $0 in 2010 and $0 in 2011.

d. None of the above.

45. 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. $195,000.

b. $200,000.

c. $240,000.

d. $245,000.

e. None of the above.

46. Samantha sells a passive activity (adjusted basis of $50,000) for $90,000. Suspended losses attributable to this property total $30,000. The realized gain and the taxable gain are:

a. $40,000 realized gain; $70,000 taxable gain.

b. $10,000 realized gain; $10,000 taxable gain.

c. $40,000 realized gain; $0 taxable gain.

d. $40,000 realized gain; $10,000 taxable gain.

e. None of the above.

47. Alex has three passive activities with at-risk amounts in excess of $100,000 for each. During the year, the activities produced the following income (losses).

Activity A

($75,000)

Activity B

(25,000)

Activity C

    25,000 

Net passive loss

($75,000)

Alex’s suspended losses are as follows:

a. $75,000 is allocated to C; $0 to A and B.

b. $37,500 is allocated to A; $37,500 to B.

c. $56,250 is allocated to A; $18,750 to B.

d. $25,000 is allocated to A, B, and C.

e. None of the above.

48. In the current year, Crow Corporation, a closely held C corporation that is not a personal service corporation, has $100,000 of passive losses, $80,000 of active business income, and $20,000 of portfolio income.  How much of the passive loss may Crow deduct in the current year?

a. $0.

b. $20,000.

c. $80,000.

d. $100,000.

e. None of the above

49. In the current year, Spring Corporation, a closely held personal service corporation, has $120,000 of passive losses, $70,000 of active business income, and $50,000 of portfolio income. How much of the passive loss may Spring deduct in the current year?

a. $120,000.

b. $70,000.

c. $50,000.

d. $0.

e. None of the above.

50. Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments.

a. If Charles elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income.

b. Charles may not treat Department A and Department B as separate activities because they are parts of one business.

c. If Charles elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income. 

d. If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income. 

e. None of the above.

51. Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away.

a. All four businesses can be treated as a single activity if Tara elects to do so.

b. Only the shoe store and bookstore can be treated as a single activity, the restaurant must be treated as a separate activity, and the jewelry store must be treated as a separate activity.

c. The shoe store, bookstore, and restaurant can be treated as a single activity, and the jewelry store must be treated as a separate activity.

d. All four businesses must be treated as separate activities.

e. None of the above.

52. 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.

53. Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?

a. The interdependencies between the activities.

b. The extent of common control.
c. The extent of common ownership.

d. The geographical location.

e. All of the above are relevant factors.

54. Art owns significant interests in a hardware store and a bookstore at a mall in Washington, D.C. He also owns a hardware store and a bookstore at a mall in San Francisco. Which of the following is not a way in which the interests may be grouped?

a. One activity.

b. A hardware activity and a bookstore activity.

c. A Washington, D.C. activity and a San Francisco activity.

d. Four separate activities.

e. Any of the above may be the basis for grouping.

55. Rick, a computer consultant, owns a separate business (not real estate) in which he participates. He has one employee who works part-time in the business.

a. If Rick participates for 500 hours and the employee participates for 620 hours during the year, Rick qualifies as a material participant.

b. If Rick participates for 550 hours and the employee participates for 2,000 hours during the year, Rick qualifies as a material participant.

c. If Rick participates for 120 hours and the employee participates for 120 hours during the year, Rick does not qualify as a material participant.

d. If Rick participates for 95 hours and the employee participates for 5 hours during the year, Rick probably does not qualify as a material participant.

e. None of the above.

56. Ned, a college professor, owns a separate business (not real estate) in which he participates in the current year. He has one employee who works part-time in the business.

a. If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant.

b. If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant.

c. If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant.

d. If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant.

e. None of the above.

57. 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?

a. Activities A, B, C, and D are all significant participation activities.

b. Paula is a material participant with respect to Activities A, B, C, and D.

c. Paula is not a material participant with respect to Activities A, B, C, and D.

d. Losses from all of the activities can be used to offset Paula’s active income.

e. None of the above.

58. Tom owns five activities, and he elects not to group them together as a single activity under the “appropriate economic unit” standard.  During the year, he participates for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, 110 hours in Activity D, and 100 hours in Activity E. 

a. Activities A, B, C, D, and E are all significant participation activities.

b. Tom is a material participant only in Activities A, B, and C.

c. Tom is a material participant in Activities A, B, C, D, and E.

d. Tom is not a material participant in any of the activities.

e. None of the above.

59. 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.

60. 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.

61. Sarah, who owns a 50% interest in a grocery store, was a material participant in the activity for the last 25 years. She retired from the grocery store at the end of last year and will not participate in the activity in the future. However, she continues to be a material participant in an office supply store in which she is a 50% partner. The operations of the grocery store resulted in a loss for the current year and Sarah’s share of the loss is $40,000. Sarah’s share of the income from the office supply store is $75,000. She does not own interests in any other activities.

a. Sarah cannot deduct the $40,000 loss from the grocery store because she is not a material participant.

b. Sarah will not be able to deduct any losses from the grocery store until future years. 

c. Sarah can offset the $40,000 loss from the grocery store against the $75,000 of income from the office supply store.

d. Sarah will not be able to deduct any losses from the grocery store until she has been retired for at least four years.

e. None of the above.

62. Jed spends 32 hours a week, 50 weeks a year, operating a DVD rental store that he owns. He also owns a music store in another city that is operated by a full-time employee. He elects not to group them together as a single activity under the “appropriate economic unit” standard. Jed spends 40 hours per year working at the music store.

a. Neither store is a passive activity.

b. Both stores are passive activities.

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

d. Only the music store is a passive activity.

e. None of the above.

63. Jenny spends 32 hours a week, 50 weeks a year, operating a DVD rental store that she owns. 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 DVD rental store is a passive activity.
d. Only the music store is a passive activity.
e. None of the above.

64. Skeeter invests in vacant land for the purpose of realizing a profit on its appreciation. He leases the land during the period he holds it. The unadjusted basis of the property is $75,000 and its fair market value is $105,000. The lease payments are $1,200 per year.

a. The leasing activity will be treated as a rental activity and will be treated as a passive activity regardless of how many hours Skeeter participates.

b. The leasing activity will be treated as a rental activity and will not be treated as a passive activity if Skeeter qualifies as a real estate professional.

c. The leasing activity will not be treated as a rental activity.

d. The leasing activity will be treated as a rental activity and will not be treated as a passive activity if Skeeter devotes more than 500 hours to the activity.

e. None of the above.

65. Kenton has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $110,000 in the current year. At the beginning of this year, Kenton’s at-risk amounts in Activities A and B are $10,000 and $120,000, respectively. What is the amount of Kenton’s suspended passive loss with respect to these activities at the end of the current year?

a. $100,000.

b. $50,000.

c. $40,000.

d. $0.
e. None of the above.

66. Rachel acquired a passive activity several years ago.  Until 2008, the activity was profitable, and Rachel’s at-risk amount at the beginning of 2008 was $300,000.  The activity produced losses for Rachel of $80,000 in 2008, $50,000 in 2009, and $70,000 in 2010.  In 2011, the activity produced income of $90,000.  How much is Rachel’s suspended passive loss at the beginning of 2012?

a. $150,000.

b. $110,000.

c. $60,000.

d. $0.
e. None of the above.

67. Emily earns a salary of $150,000, and invests $60,000 for a 20% interest in a passive activity.  Operations of the activity result in a loss of $400,000, of which Emily’s share is $80,000.  How is her loss characterized?

a. $60,000 is suspended under the passive loss rules and $20,000 is suspended under the at-risk rules.

b. $60,000 is suspended under the at-risk rules and $20,000 is suspended under the passive loss rules.

c. $80,000 is suspended under the passive loss rules.

d. $80,000 is suspended under the at-risk rules.

e. None of the above.

68. Several years ago, Joy acquired a passive activity.  Until 2009, the activity was profitable.  Joy’s at-risk amount at the beginning of 2009 was $250,000.  The activity produced losses of $100,000 in 2009, $80,000 in 2010, and $90,000 in 2011.  During the same period, no passive income was recognized.  How much is suspended under the at-risk rules and the passive loss rules at the beginning of 2012?
      At-risk      Passive loss

a. $0            $270,000.

b. $20,000            $250,000.

c. $30,000            $240,000.

d. $260,000      $10,000.

e. None of the above.

69. Jerry’s at-risk amount in a passive activity is $100,000 at the beginning of the current year. His current loss from the activity is $45,000. Jerry had no passive activity income during the year. At the end of the current year:

a. Jerry has an at-risk amount in the activity of $55,000 and a suspended passive loss of $45,000.

b. Jerry has an at-risk amount in the activity of $100,000 and a suspended passive loss of $45,000.

c. Jerry has an at-risk amount in the activity of $55,000 and no suspended passive loss.

d. Jerry has an at-risk amount in the activity of $100,000 and no suspended passive loss.

e. None of the above.

70. Wes’s at-risk amount in a passive activity is $25,000 at the beginning of the current year. His current loss from the activity is $35,000 and he has no passive activity income. At the end of the current year, which of the following statements is incorrect?

a. Wes has a loss of $25,000 suspended under the passive loss rules.

b. Wes has an at-risk amount in the activity of $0.

c. Wes has a loss of $10,000 suspended under the at-risk rules.

d. Wes has a loss of $35,000 suspended under the passive loss rules.

e. None of the above is incorrect.

71. Jon owns an apartment building in which he is a material participant and a computer consulting business. Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business.

a. The computer consulting business is a passive activity but the apartment building is not.

b. The apartment building is a passive activity but the computer consulting business is not.

c. Both the apartment building and the computer consulting business are passive activities.

d. Neither the apartment building nor the computer consulting business is a passive activity.

e. None of the above.

72. Consider the following three statements:

(1)

Tad invests in vacant land for the purpose of realizing a profit on its appreciation. He leases the land during the period he holds it. The unadjusted basis of the property is $25,000 and its fair market value is $35,000. The lease payments are $400 per year.

(2)

A farmer owns land with an unadjusted basis of $25,000 and a fair market value of $35,000. He used it for farming purposes in the two prior years. In the current year, he leases the land to another farmer for $400.

(3)

At City Hospital, each inpatient is provided a private room while medical care is provided.

In which of the three cases above could the rental activity automatically be considered a passive activity?

a. Case 1 only.

b. Case 2 only.

c. Case 3 only.

d. Cases 1, 2, and 3.

e. None of the above.

73. Andrea, a single taxpayer, has $90,000 in salary, $15,000 in income from a limited partnership, and a $40,000 passive loss from a real estate rental activity in which she actively participates.  Her modified adjusted gross income is $90,000.  Of the $40,000 loss, Andrea may deduct:

a. $0.

b. $15,000.

c. $25,000.

d. $40,000.

e. Some other amount.

74. Roxanne, who is single, has $125,000 of salary, $10,000 of income from a limited partnership, and a $26,000 passive loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $125,000. Of the $26,000 loss, how much is deductible?

a. $0.

b. $10,000.

c. $25,000.

d. $26,000.

e. None of the above.

75. Lucy dies owning a passive activity with an adjusted basis of $90,000. Its fair market value at that date is $145,000. Suspended losses relating to the property were $75,000. Which of the following statements is true?

a. The heir’s adjusted basis is $145,000, and Lucy’s final deduction is $20,000.

b. The heir’s adjusted basis is $145,000, and Lucy’s final deduction is $75,000.

c. The heir’s adjusted basis is $90,000, and Lucy’s final deduction is $75,000.

d. The heir’s adjusted basis is $220,000, and Lucy has no final deduction.

e. None of the above.

76. Caroyl made a gift to Tim of a passive activity (adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000). No gift tax resulted from the transfer.

a. Tim’s adjusted basis is $80,000, and Tim can deduct the $20,000 of suspended losses in the future.

b. Tim’s adjusted basis is $80,000.

c. Tim’s adjusted basis is $50,000, and the suspended losses are lost. 

d. Tim’s adjusted basis is $50,000, and Tim can deduct the $20,000 of suspended losses in the future. 

e. None of the above.

77. Identify from the list below the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition.

a. Disposition of a passive activity by gift.

b. Nontaxable exchange of a passive activity.

c. Disposition of a passive activity at death.

d. Installment sale of a passive activity.

e. None of the above.

78. Tony is married and files a joint tax return for 2011.  He has investment interest expense of $95,000 for a loan made to him in 2011 to purchase a parcel of unimproved land.  His income from investments [dividends (not qualified) and interest] totaled $18,000.  Tony paid $3,600 of real estate taxes on the unimproved land.  Tony also has a $4,500 net long-term capital gain from the sale of stock held as an investment.  Calculate Tony’s maximum investment interest deduction for 2011.

a. $95,000.

b. $22,500.

c. $18,900.

d. $18,000.

e. None of the above.

79. Ramon incurred $83,100 of interest expense related to his investments in 2011.  His investment income included $34,500 of interest and a $37,500 net capital gain on the sale of securities.  What is the maximum amount of Ramon’s investment interest expense deduction in 2011?

a. $19,500.

b. $34,500.

c. $72,000.

d. $83,100.

e. None of the above.