Ch. 12 Homework Solutions 12(1)

Ch. 12 Homework Solutions 12(1) - Solutions to Problem...

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Solutions to Problem Materials 1 CH. 12 - SOLUTIONS TO PROBLEM MATERIALS 12-11 Taxpayers are required to treat one or more trade or business activities or one or more rental activities as a single activity if the activities constitute an appropriate economic unit for measuring gain or loss. Whether two or more activities constitute an appropriate economic unit (AEU) is determined by taking into account all of the relevant facts and circumstances. Five factors are to be given the greatest weight in making the determination. These are: 1. Similarities and differences in types of business. 2. The extent of common control 3. The extent of common ownership 4. Geographical location. 5. Interdependencies between activities (e.g., they have the same customers or same employees, are accounted for with a single set of books, purchase or sell goods between themselves, involve products or services that are normally provided together) A taxpayer may use any reasonable method of applying the relevant facts and circumstances. The key ingredient to this rather loose approach is that the taxpayer must be consistent once a particular method of aggregation is selected. Note also that the IRS has the power to regroup activities if the taxpayer’s grouping fails to reflect one or more appropriate economic units and one of the primary purposes of the taxpayer’s grouping is to circumvent the passive loss rules. a. The taxpayer could treat these as either one activity since they are in the same geographical location or alternatively treat them as separate activities. b. The regulations prohibit aggregation of rental and nonrental activities unless either activity is insubstantial to the other. In this case, the income from both activities is substantial so each activity would be treated as a separate activity. c. The taxpayer could treat each store as a separate activity or combine all of the stores since they are in the same location (Denver) or because they are the same type of business. Other groupings could be appropriate, however. d. The taxpayer would appear to have great flexibility in how he groups the activities. As a practical matter, it seems that it would be easiest to aggregate these in the same manner as the taxpayer maintains his accounting records. Nevertheless, if the taxpayer has passive losses or wants to avoid passive losses, he may wish to consider other arrangements. Possible permutation and combinations include but are not limited to: • Treat each gas station as a separate activity. • Treat all of the gas stations as one large activity since they are in the same type of business. • Treat each food sale activity in each station as a separate activity and each gas sale activity in each station as a separate activity.
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