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
A passive activity is any trade or business in which the taxpayer does not
A passive activity also includes any rental activity that is not a
trade or business.
Individuals, estates, trusts, closely held C corporations, personal service
corporations, and certain publicly traded partnerships, are subject to the passive loss
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.
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.
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.
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:
The rental unit is Laura's only business and she spends over 750 hours
during the year managing and caring for the rental unit.
Because Laura is the sole manager of the unit, she meets the material
More than 50% of Laura's personal services for the year is spent in this
real estate business.
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
In order to materially participate, the taxpayer must meet one of several tests:
The individual participates in the activity for more than 500 hours during
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.