Chapter+8

Chapter+8 - AF 450 Federal Taxation I Dr. Julia M. Camp...

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AF 450 – Federal Taxation I Dr. Julia M. Camp Solutions to Suggested Problems Chapter 8: 9, 10, 13, 14, 15, 16, 17, 19, 21, 22, 23, 30, 43, 47, 48, 51, 52, 54, 57 I:0-1 a. A passive activity is any trade or business in which the taxpayer does not materially participate. A passive activity also includes any rental activity that is not a trade or business. b. Individuals, estates, trusts, closely held C corporations, personal service corporations, and certain publicly traded partnerships, are subject to the passive loss limitation rules. The purpose of the passive loss rules is to prevent certain taxpayers from offsetting their portfolio and active income with losses generated in passive activities. pp. I:8-9 through I:8-12. I:0-2 a. A closely held C corporation is a C corporation where more than 50% of the stock is owned by five or fewer individuals at any time during the last half of the corporation's taxable year. b. A closely held C corporation may offset its passive losses against its active business income but not its portfolio income. Individuals and personal service corporations may not offset either their active or portfolio income with passive losses. p. I:8-12. I:0-3 a. No. The rental unit qualifies as a real property trade or business with respect to Laura. This is the case because she meets the following requirements: 1. The rental unit is Laura's only business and she spends over 750 hours during the year managing and caring for the rental unit. 2. Because Laura is the sole manager of the unit, she meets the material participation requirements. 3. More than 50% of Laura's personal services for the year is spent in this real estate business. b. Yes. The lab is a passive activity with respect to Kami. A business activity is passive with respect to a taxpayer if the taxpayer does not materially participate in the activity. In order to materially participate, the taxpayer must meet one of several tests: 1. The individual participates in the activity for more than 500 hours during the year. 2. The individual's participation in the activity for the year constitutes substantially all of the participation in the activity by all individuals, including individuals who do not own any interest in the activity.
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3. The individual participates in the activity for more than 100 hours during the year, and that participation is more than any other individual's participation for the year. 4. Under the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during the year. The only test Kami possibly could meet is the fourth one. However, her participation is probably not continuous and substantial. Since Kami does not meet any of these tests, she does not materially participate, and the activity is passive. c.
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This note was uploaded on 04/27/2008 for the course AF 450 taught by Professor Juliam.camp during the Spring '08 term at Bryant.

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Chapter+8 - AF 450 Federal Taxation I Dr. Julia M. Camp...

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