A closely held corporation may offset passive loss against active income, but not against portfolio income. Lilac
may deduct only $180,000 of its $195,000 passive loss.
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(TCO 2) Sage, Inc., a closely held corporation (not a PSC), has a $140,000 passive loss, $85,000 of active business
income, and $35,000 of portfolio income. How much of the passive loss can Sage deduct?
As a closely held corporation, Sage may offset $85,000 of the $140,000 passive loss against the $85,000 of active
business income, but may not offset the remaining $55,000 against portfolio income. REF: Example 15
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(TCO 2) Star Corporation, a cash basis and calendar year taxpayer, was formed and began operations on July 1, of
the current year. Star incurred the following expenses during its first year of operations (July 1-December 31,
Expenses of temporary directors and of organizational meetings
Fee paid to the state of incorporation
Expenses in printing and sale of stock certificates
Legal services for drafting the corporate charter and bylaws