Chapter 12 - CHAPTER 12-DEDUCTIONS FOR CERTAIN INVESTMENT...

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CHAPTER 12—DEDUCTIONS FOR CERTAIN INVESTMENT EXPENSES AND LOSSES TRUE/FALSE 1. The form of organization usually used for traditional tax shelters is a C corporation. ANS: F Traditional tax shelters utilized a flow through entity, usually a limited partnership. The flow through characteristic was attractive since it enabled losses or credits to flow through to the individual in- vestors. PTS: 1 REF: p. 12-2 2. The acceleration of expenses to early periods and the postponement of income to later periods are key ingredients of most tax shelters. The term used to describe this aspect of a tax shelter is conversion. ANS: F The acceleration of expenses to early periods and the postponement of income to later periods is a key ingredient of most tax shelters. However, this mismatching of expenses and revenues is referred to as deferral. PTS: 1 REF: p. 12-3 3. In tax shelter jargon, conversion concerns the differing tax treatments given to losses arising from the tax shelter activity and the gains upon the sale of the activity. ANS: T In a tax shelter, the excess of deductions over income offset ordinary income while gains on the sub- sequent sale are treated as long-term capital gains. PTS: 1 REF: pp. 12-3 and 12-4). 4. The at-risk rules generally limit the amount of deductible losses from an activity to the amount of re- sources that the investor has committed to the activity. ANS: T Under the at-risk rules of § 465, a taxpayer's deduction of losses from an activity are limited to the amount the taxpayer has at-risk—the amount of resources that the taxpayer could actually lose. PTS: 1 REF: pp. 12-6 5. The at-risk and passive loss rules operate so as to affect the character of gain or loss on the sale of an investment activity. ANS: F The at-risk and passive loss rules both operate to limit the losses a taxpayer deducts from an activity. PTS: 1 REF: pp. 12-6 and 12-9) 6. A taxpayer's at-risk amount increases only for contributions of cash and property and income earned by the activity that is not withdrawn from the business.
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ANS: F The at-risk amount also includes the taxpayer's share of increases in recourse and qualified nonre- course debt. PTS: 1 REF: Example 7 and pp. 12-6 and 12-7 7. The at-risk amount is reduced by distributions and losses. ANS: T Since the at-risk amount reflects the resources that are committed to the venture, distributions and losses both reduce the at-risk amount. PTS: 1 8. J and K decided they wanted to get in the rental real estate business. This year J and K formed a part- nership. The partnership bought a 200 unit complex called Lazy Acres from the Trumpet Group for $1,000,000. The partnership gave Trumpet $200,000 cash and a note for $800,000 which was secured by the apartment complex. For purposes of the at-risk rules, the note to Trumpet is considered quali- fied nonrecourse financing. ANS: F
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This note was uploaded on 04/06/2011 for the course ECON 3332 taught by Professor Craig during the Spring '11 term at Rensselaer Polytechnic Institute.

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Chapter 12 - CHAPTER 12-DEDUCTIONS FOR CERTAIN INVESTMENT...

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