South-Western Federal Taxation 2016

Essentials of Taxation Individuals and

Business Entities 19th Edition Raabe Solution
Manual
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CHAPTER 6

LOSSES AND LOSS LIMITATIONS

SOLUTIONS TO PROBLEM MATERIALS

COMPUTATIONAL EXERCISES

1. (LO 1) Jane must include the $10,000 in gross income of the current tax year, but only to the extent of the
tax benefit in the previous year. Because Jane had capital gains of $5,000 in the previous year, the $50,000
bad debt could be used to the extent of $8,000 ($5,000 + $3,000) last year. Hence, Jane would have to
include $8,000 of the $10,000 received in gross income in the current year.

2. (LO 1) Bob has no bad debt deduction. Rather, he has a gain of $12,000 [$60,000 − $48,000 (basis in
the account receivable)].

3. (LO 2) It is possible to receive an ordinary loss deduction if the loss is sustained on small business
stock (§ 1244 stock). Only individuals who acquired the stock from the corporation are eligible to
receive ordinary loss treatment under § 1244. The ordinary loss treatment is limited to $50,000

6-1
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6-2 2016 Essentials of Taxation/Solutions Manual

($100,000 for married individuals filing jointly) per year. Losses on § 1244 stock in excess of the
statutory limits receive capital loss treatment.

Therefore, Calvin’s total loss of $61,750 ($68,750 − $7,000) is treated as follows: $50,000 is ordinary
loss and the remaining $11,750 ($61,750 − $50,000) is long-term capital loss.

4. (LO 3) Mary should include the recovery as gross income in her 2015 tax return, but only to the extent of
the tax benefit in the prior year. Mary’s deduction in the prior year would have been $3,900 computed as
follows:

Amount of loss $ 8,000

Less: $100 floor (100)
10%  40,000 (4,000)
Deduction $ 3,900

Therefore, Mary must include $3,900 in gross income in 2015.

5. (LO 3) The amount of the loss is $600,000, the lesser of the decline in FMV $600,000 ($800,000 −
$200,000) or basis of $650,000.

6. (LO 6)
Beginning at-risk amount $ 0
Investment in partnership 30,000
Plus: Share of current partnership taxable income 2,000
Less: Withdrawals from the partnership (10,000)
Ending at-risk amount $22,000

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 Losses and Loss Limitations 6-3

7. (LO 6)
Amount realized $330,000
Less: Adjusted basis (305,000)
Total gain $ 25,000
Less: Suspended losses (28,000)
Deductible loss (not passive) ($ 3,000)

The $3,000 loss may be deducted against ordinary and portfolio income.

8. (LO 8)
a. Beginning adjusted basis and at-risk amount $ 7,500
Less: Current loss allowable (7,500)
Ending adjusted basis and at-risk amount $ 0

b. The current passive loss is $12,000. Because $7,500 of the loss is used to reduce the at-risk
amount to $0, $4,500 is suspended under the at-risk rules ($12,000 − $7,500 = $4,500).

c. The $7,500 loss that is not limited by the at-risk rules is subject to the passive loss rules.
Because the taxpayer has not generated any passive income during the year, this $7,500 current-
year passive loss is suspended. Therefore, the total suspended passive loss carried forward to
subsequent years totals $9,000 ($7,500 current-year suspended loss + $1,500 prior year
suspended loss).

9. (LO 9)
Passive income $ 20,000
Real estate rental activity income $ 33,000
Less: Real estate rental activity losses (70,000)
Net loss from real estate rental activities (37,000)
Deductible loss ($ 17,000)

Because the losses arise from real estate rental activities in which Noah actively participates, up to
$25,000 of such losses may be deducted. In this case, the total amount of net real estate rental losses is
deducted, and no further restrictions apply because his AGI is below $100,000. The $17,000 deductible
loss may offset active and portfolio income.

10. (LO 10) When a transfer of a taxpayer’s interest occurs because of the taxpayer’s death, suspended
passive losses are allowed to the decedent to the extent they exceed the amount of the allowed step-up
in basis. At the time of Rose’s death, the property’s basis will be stepped up by $25,000—from $65,000
to its fair market value of $90,000. Because the suspended passive loss is $13,000 (i.e., below the
$25,000 step up in basis), none of the suspended loss is deductible. In addition, the beneficiary would
not be allowed to deduct the $13,000 suspended loss.

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6-4 2016 Essentials of Taxation/Solutions Manual

PROBLEMS

11. (LO 1) Raabe, Maloney, Young, Smith, & Nellen, CPAs

5191 Natorp Boulevard
Mason, OH 45040
January 29, 2016
Loon Finance Company
100 Tyler Lane
Erie, PA 16563
Dear Sir:
This letter is to inform you of the possibility of taking a bad debt deduction.
Your loan to Sara is a business bad debt; therefore, you are allowed to take a bad debt deduction for
partial worthlessness. You will be able to take a bad debt deduction in the current year of $25,000
[($30,000 − $1,000) − $4,000].
Should you need more information or need to clarify anything, please contact me.
Sincerely,
John J. Jones, CPA
Partner

TAX FILE MEMORANDUM

Date: January 29, 2016
From: John J. Jones
Subject: Bad Debt Deduction
Loon Finance Company’s $30,000 loan to Sara is a business bad debt. Therefore, a bad debt deduction
is allowed for partial worthlessness. Loon will be able to claim a bad debt deduction in the current year
of $25,000 [($30,000 − $1,000) − $4,000].
12. (LO 1) Monty must include up to $10,000 in gross income, but only to the extent of a tax benefit in a
prior year. Because the debt is a nonbusiness bad debt, the $11,000 would have been reported as a short-
term capital loss. Last year, Monty had capital gains of $4,000 and taxable income of $20,000.
Therefore, $7,000 of the $11,000 loss produced a tax benefit. Hence, only $7,000 would be included in
Monty’s gross income this year.

13. (LO 2) Jack should be concerned with the following issues:

• Should this be treated as a worthless security?
• Should this be treated as a theft loss?
o Does the theft loss create an NOL?
o Can the NOL be carried back three years?
14. (LO 1) Worthless debts arising from unpaid wages are not deductible as a bad debt unless the taxpayer
has included the amount in income for the year for which the bad debt is deducted or for a prior tax
year. Jake used the cash method of reporting income. Therefore, fees for services by Jake that allegedly
were owed by the City have never been included in income, and unpaid amounts, even if earned, do

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 Losses and Loss Limitations 6-5

not constitute bad debts within the meaning of §166 for which a deduction for worthlessness may be
claimed.
15. (LO 1, 2)
Salary $120,000
§ 1244 ordinary loss (limit of $100,000) (100,000)
Short-term capital gain on § 1244 stock $ 20,000
Short-term capital loss (nonbusiness bad debt) (19,000)
Net short-term capital gain 1,000
Net long-term capital loss (remaining § 1244 loss) (5,000)
Net capital loss (limited to $3,000; $1,000 LTCL carryover) (3,000)
Adjusted gross income $ 17,000

16. (LO 2) Sell all of the stock in the current year:

Current year’s AGI
Salary $ 80,000
Ordinary loss (§ 1244 limit) (50,000)
Long-term capital gain $ 8,000
Long-term capital loss ($80,000 − $50,000) (30,000)
Long-term capital loss (limited to $3,000; $19,000 LTCL carryover) (3,000)
AGI $ 27,000
Next year’s AGI
Salary $ 90,000
Long-term capital gain $ 10,000
Long-term capital loss carryover ($30,000 − $11,000) (19,000)
Long-term capital loss (limited to $3,000; $6,000 LTCL carryover) (3,000)
AGI $ 87,000
Total AGI
Current year $ 27,000
Next year 87,000
Total $114,000
Sell half of the stock this year and half next year:

Current year’s AGI

Salary $ 80,000
Ordinary loss (§ 1244 stock) (40,000)
Long-term capital gain 8,000
AGI $ 48,000
Next year’s AGI
Salary $ 90,000
Ordinary loss (§ 1244 stock) (40,000)
Long-term capital gain 10,000
AGI $ 60,000
Total AGI
Current year $ 48,000
Next year 60,000
Total $108,000
Mary’s combined AGI for the two years is lower if she sells half of her § 1244 stock this year and half
next year.

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6-6 2016 Essentials of Taxation/Solutions Manual

17. (LO 3) The amount of the loss before the 10%-of-AGI limitation is computed as follows:

Home ($350,000 − $280,000) $70,000

Auto ($30,000 − $20,000) 10,000
Total loss $80,000
Less: $100 (100)
Loss before 10% of AGI $79,900

Because the President declared the area a disaster area, Olaf and Anna could claim the loss on last
year’s return (2014) or on the current year’s return (2015).

Amount of loss on last year’s return:

Loss $ 79,900
Less: 10% of AGI (10%  $180,000) (18,000)
Total loss $ 61,900

Amount of loss on current year’s return:

Loss $ 79,900
Less: 10% of AGI (10%  $300,000) (30,000)
Total loss $ 49,900

If Olaf and Anna apply the loss to 2014, the benefit of the loss will be at a rate of 25% because taxable
income will be $78,100 ($140,000 − $61,900) and the loss falls entirely within the 25% tax bracket. If
the loss is applied to 2015, the benefit will be at a rate of 28% because taxable income will be $165,100
($215,000 − $49,900) and the loss falls entirely within the 28% tax bracket. The tax savings will be
$15,475 (25%  $61,900) if the loss is taken in 2014 and $13,972 (28%  $49,900) if the loss is taken
in 2015. Therefore, Olaf and Anna should include the loss on their 2014 return, because the tax savings
is $1,503 ($15,475 − $13,972) greater.

18. (LO 3) The tax issues for John are as follows:

• Is the loss a theft loss or an investment loss?

• Is the loss subject to either the personal loss limits ($100 floor and 10%-of-AGI floor) or the limits
on itemized deductions (2%-of-AGI floor)?

• How is the amount of the loss determined?

• What year can the loss be taken?

19. (LO 4)
a. Business receipts $ 144,000
Less: Business expenses (180,000)
Net business loss ($ 36,000)
Alimony received 22,000
Interest income 3,000
Adjusted gross income ($ 11,000)
Less: Itemized deductions (24,000)
Personal and dependency exemptions (3 × $4,000) (12,000)
Taxable income ($ 47,000)

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 Losses and Loss Limitations 6-7

b. Taxable income ($ 47,000)

Add: Personal and dependency exemptions 12,000
Excess of nonbusiness deductions ($24,000)
over nonbusiness income ($3,000 + $22,000) –0–
NOL ($ 35,000)

In calculating the NOL, the alimony received of $22,000 is not treated as business income.

20. (LO 6) The at-risk rules limit Fred’s deductions. He can deduct $35,000 in 2014, thereby reducing his
at-risk amount to $15,000 ($50,000 original investment − $35,000 deducted). He will be limited to a
$15,000 deduction in 2015 unless he increases his amount at risk. Fred’s share of the partnership losses
is not subject to the passive loss restrictions because his interest is not a passive activity.

21. (LO 6) Raabe, Maloney, Young, Smith, & Nellen, CPAs

5191 Natorp Boulevard
Mason, OH 45040
November 4, 2015
Mr. Bill Parker
54 Oak Drive
St. Paul, MN 55164

Dear Mr. Parker:

This letter is in response to your inquiry regarding the tax treatment of losses that you could expect this
year and next year from an investment in Best Choice Partnership. As I understand the facts, you would
invest $60,000 in the partnership with the expectation that your share of the partnership losses in the
current and succeeding years would be $40,000 and $25,000, respectively.
Even though your investment would not be subject to the passive activity limitations, the amount of the
deduction that you may claim in any one year is subject to the at-risk rules. Essentially, these rules
provide that your deductions are limited to the amount that you have invested in the venture or the
amount that you could lose if the investment were to be unsuccessful. Consequently, in your case, the
initial amount that you would have at risk would be $60,000. Therefore, you would be able to deduct
$40,000 in the current year, which would cause your at-risk basis to be reduced to $20,000 ($60,000 −
$40,000). Because your at-risk basis at the end of next year would be only $20,000, your share of the
partnership loss that would be deductible would be limited to $20,000. The amount not deducted under
this scenario would be deductible later when your at-risk basis increases, for example, by additional
investments you may make in the partnership or because of income generated by the partnership.

If you have additional questions or need further clarification, please call me.
Sincerely,
John J. Jones, CPA

22. (LO 6) In 2014, Kay cannot deduct any of the passive loss because of the impact of the passive loss
rules (she has no passive income). The $35,000 loss is suspended and carried forward to 2015, where
$15,000 is deducted. After $15,000 is deducted, the remaining $20,000 of the 2014 passive loss remains
suspended.

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6-8 2016 Essentials of Taxation/Solutions Manual

23. (LO 6)
If Activity A is sold in the current year, the following results:

Gain from Activity A $115,000

Less: Suspended losses from Activity B
($35,000 + $35,000 + $8,000) (78,000)
Taxable gain $ 37,000
Federal income tax (at 28%) $ 10,360

In addition, the $30,000 loss (and the corresponding tax benefit of $8,400) from Activity B expected to
be incurred next year would be suspended until passive income is generated. The prospects of gaining
the use of the tax benefit at this time are nil.

If Activity A is sold next year, the following results:

Gain from Activity A $108,000
Less: Suspended losses from Activity B
($35,000 + $35,000 + $8,000 + $30,000) (108,000)
Taxable gain $ –0–
Tax (at 28%) $ –0–

Therefore, by deferring the sale until next year, Jorge is able to avoid the current payment of a $10,360
Federal tax liability. In addition, the expected gain from the sale can be offset by all of the suspended
passive loss from Activity B (including the expected $30,000 loss from next year). By deferring the
sale, Jorge’s short-term cash flow increases by $3,360.

Reduced sales price ($ 7,000)

Reduced Federal income tax 10,360
Increase in cash flow $ 3,360
24. (LO 6) Last year, Sarah could deduct nothing against nonpassive income and was required to allocate
the $20,000 net loss among the three loss activities.
Income (loss):
Activity A $30,000
Activity B (30,000)
Activity C (15,000)
Activity D (5,000)
Net passive loss ($20,000)

Net passive loss allocated to:

Activity B (30/50 × $20,000) ($12,000)
Activity C (15/50 × $20,000) (6,000)
Activity D (5/50 × $20,000) (2,000)
Total suspended losses ($20,000)

In the current year, Sarah has a net gain of $10,000 from the sale of Activity D. She can offset the
$2,000 suspended loss from the activity and the current year’s loss of $1,500 from the activity against
the $10,000 gain. In addition, the remaining net gain of $6,500 ($10,000 − $2,000 − $1,500) from the
sale may be used to absorb passive losses from the other activities.

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 Losses and Loss Limitations 6-9

25. (LO 6)
a. Net sales price $ 100,000
Less: Adjusted basis (35,000)
Total gain $ 65,000
Less: Suspended losses (40,000)
Taxable gain (passive) $ 25,000

b. Net sales price $ 100,000

Less: Adjusted basis (75,000)
Total gain $ 25,000
Less: Suspended losses (40,000)
Deductible loss ($ 15,000)

c. Net sales price $ 100,000

Less: Adjusted basis (75,000)
Total gain $ 25,000
Less: Suspended losses (40,000)
Deductible loss ($ 15,000)

The suspended passive losses are fully deductible. The suspended credits are lost forever
because the sale of the activity did not generate any tax.

26. (LO 6)
a. A personal service corporation is not allowed to offset passive losses against active or portfolio
income. Therefore, White’s taxable income is $436,000 ($400,000 income from operations +
$36,000 portfolio income).

b. A closely held, nonpersonal service corporation is allowed to offset passive losses against
active income, but not against portfolio income. Therefore, White’s taxable income is $396,000
($400,000 income from operations − $40,000 passive loss + $36,000 portfolio income).

27. (LO 7) John is entitled to treat the loss as active if his participation constitutes substantially all
of the participation in the activity of individuals (including nonowner employees) for the year. If
John is the only individual who participates in the activity, he would be entitled to an active loss
deduction.
28. (LO 7)
• The amount of Rene’s at-risk basis in the hardware business and whether the losses flowing from
the entity are limited by the at-risk rules.

• Whether the profits and losses from the public accounting firm are classified as passive or active.

• Whether Rene is a material participant in the hardware business.

• Whether Rene is subject to the passive loss rules.

29. (LO 6, 8) Raabe, Maloney, Young, Smith, & Nellen, CPAs

5191 Natorp Boulevard
Mason, OH 45040
January 23, 2016

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6-10 2016 Essentials of Taxation/Solutions Manual

Ms. Kristin Graf

123 Baskerville Mill Road
Jamison, PA 18929
Dear Kristin:
This letter is in response to your request for assistance in analyzing the tax consequences from two
investment alternatives. One alternative is to make an additional investment of $10,000 in Rocky Road
Excursions. Here you have an at-risk basis of $0, suspended losses under the at-risk rules of $7,000,
and suspended passive losses of $1,000. If this investment is made, your share of the projected profits
for this year would increase from $1,000 to $8,000. The other choice is to invest $10,000 as a limited
partner in the Ragged Mountain Winery. This would produce passive income of $9,000 this year. The
following analysis is based on these facts.

Invest $10,000 in Rocky Road Excursions:

Expected profit from investment $8,000
Beginning at-risk basis $ –0–
Increase to at-risk basis due to profit 8,000
Increase to at-risk basis due to investment 10,000
$18,000
Use of loss suspended by at-risk rules (7,000)
Ending at-risk basis $11,000
Beginning suspended passive loss ($ 1,000)
Reclassified suspended passive loss (7,000)
Use of suspended passive losses—revised (8,000)
Current taxable income $ –0–
Current tax liability $ –0–

Invest $10,000 in Ragged Mountain Winery:

Expected profit from investment—Ragged Mountain Winery $9,000
Expected profit from investment—Rocky Road Excursions 1,000
Use of suspended passive losses from Rocky Road Excursions
($1,000 reclassified suspended loss under the at-risk rules +
$1,000 suspended passive loss) (2,000)
Current taxable income $8,000
Current tax liability ($8,000  28%) $2,240

As you can see, the tax effects of the two options vary significantly due to the interplay of the at-risk
and the passive activity loss rules. This analysis should help you make a more informed investment
decision. If you need any further explanation, please contact me.

Sincerely,

Libba Eanes, CPA

Partner

30. (LO 8)
a. Maxine’s accountant was referring to the impact of the at-risk and passive activity loss rules
on the deductibility of the loss from the Teal investment. The at-risk rules are designed to
prevent taxpayers from deducting losses in excess of the actual economic investment in the

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 Losses and Loss Limitations 6-11

activity. The passive loss rules prevent taxpayers from deducting passive losses in excess of
passive income. In Maxine’s current situation, she apparently has no other investments that
produce passive income (i.e., she previously sold such an interest).
b. Maxine’s current at-risk amount is $1,000, and she has no other investment activity that
produces passive income. Therefore, Maxine’s current-year deduction is limited by both the
at-risk and passive loss rules. The $13,000 loss reduces the at-risk basis to $0, and the $12,000
balance of the loss is suspended. However, the $1,000 loss not limited by the at-risk rules is
suspended under the passive loss rules because Maxine does not have any passive income.
Therefore, none of the $13,000 loss can be deducted.

c. The financial adviser’s suggestion is faulty. By making an additional $12,000 investment in

Teal, the at-risk basis is increased to $13,000 ($1,000 + $12,000). This avoids any suspension
of the loss under the at-risk rules (giving her an ending at-risk basis of $0). However, because
Maxine has no passive income, the entire $13,000 loss is suspended under the passive loss
rules. Thus, none of the $13,000 loss can be deducted in the current year.
d. Maxine has two basic choices. One choice involves two steps, the first being to make the
additional $12,000 investment in Teal as suggested by her financial adviser. In addition, she
should purchase an interest in a new investment that is expected to produce passive income of
at least $13,000 annually. Under this alternative, the additional investment in Teal ensures that
the at-risk rules will not limit the deduction, while the investment in a new passive activity will
generate passive income against which the $13,000 loss may be offset. Maxine’s second option
is to consider selling her interest in Teal. The sale of the interest will not be restricted by the
at-risk rules, and the final economic gain or loss from her investment will be recognized for tax
purposes. If the entire interest is sold, the passive loss rules will not restrict the deductibility of
the final year’s loss or any suspended losses present.

31. (LO 8) Lee’s share of BlueSky’s loss in 2015 is $80,000 ($400,000 × 20%), and the entire loss is
suspended under the passive loss rules because he has no passive income. His share of the passive
income in 2016 is $40,000 ($200,000 × 20%). His at-risk amount is $80,000 ($120,000 − $80,000
passive loss in 2015 + $40,000 share of income in 2016). In 2016, he may deduct $40,000 of his $80,000
suspended loss against the passive income. This leaves a $40,000 suspended loss at the end of 2016.

32. (LO 6) Grace is allowed a $40,000 deduction. Because her at-risk basis is only $40,000, of the $50,000
loss, $10,000 is suspended. The available $40,000 loss is not subject to the passive activity loss rules
because she was a material participant. As the loss is treated as an active loss, Grace’s income for tax
purposes is $100,000 ($140,000 − $40,000).

33. (LO 5, 6, 8)
a. If Jonathan is not a material participant, $45,000 of his $60,000 loss ($300,000 loss
× 20% interest) is reclassified as a passive loss and disallowed under the passive loss limits.
The remaining $15,000 is disallowed by the at-risk limits. Therefore, Jonathan’s AGI is
$218,000 ($200,000 salary + 18,000 portfolio income).
b. If Jonathan is a material participant, $45,000 of his $60,000 loss is deductible as an active loss.
The remaining $15,000 is disallowed by the at-risk limits. Therefore, Jonathan’s AGI is
$173,000 ($200,000 salary + $18,000 portfolio income − $45,000 active loss).

34. (LO 5, 6, 8) If losses were limited only by the at-risk rules, Gerald would be able to deduct the following
amounts in 2014 and 2015.
Year Loss Allowed* Disallowed
2014 $40,000 $30,000 $10,000

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6-12 2016 Essentials of Taxation/Solutions Manual

2015 30,000 –0– 30,000

* Allowed under the at-risk rules, reclassified as a passive loss subject to the passive loss limitations.
However, the losses also are limited by the passive loss rules as follows:
Year Passive Deductible Suspended
2014 $30,000 $–0– $30,000
2015 –0– –0– –0–
In 2016, the $50,000 income increases Gerald’s at-risk amount to $50,000, enabling him to deduct the
$40,000 of disallowed losses. The $50,000 is passive income that can be offset by $50,000 of suspended
losses, leaving a suspended loss of $20,000. At the end of 2016, Gerald has no unused losses under the
at-risk rules, $20,000 of suspended passive losses, and a $10,000 adjusted basis in the activity [$30,000
(adjusted basis on 1/1/2014) − $40,000 (loss in 2014) − $30,000 (loss in 2015) + $50,000 (income in
2016)].

35. (LO 5, 6, 7) Raabe, Maloney, Young, Smith, & Nellen, CPAs

5191 Natorp Boulevard
Mason, OH 45040
December 15, 2015
Scott Myers
603 Pittsfield Dr.
Champaign, IL 61821
Dear Scott,
Based on our discussion, I understand that you are attempting to qualify under the special rules for real
estate professionals as a material participant in order to deduct against your nonpassive income any
losses generated by this rental activity. Consequently, you should document a sufficient number of
hours so that you will meet the material participation standard.
Your activities to date appear to be within the bounds of the tax law as it is written, but you also appear
to be stretching its limits. You need to be careful to avoid any appearance of or taking any actual
fraudulent actions on your or your wife’s part. Essentially, the issue is whether the participation hours
generated are of substance or merely of form. Another issue is whether one of the principal purposes
of the tasks being performed is to avoid the disallowance of passive losses or credits.
Should you need more information or need me to clarify anything, please call.
Sincerely,
Jake Smith, CPA
36. (LO 6, 9) Bonnie and Jake are much better off filing jointly (a tax liability based on the 2015 rate
schedules of $2,498 if filing jointly compared with $5,644 if filing separately). The decrease in medical
deductions [($8,500 − $2,675) versus ($8,500 − $4,700)] is more than offset by the fact that they lose
their rental loss deduction if they file separately because they live together.
Bonnie Jake Joint
Income:
Salaries $42,500 $26,000 $68,500
Interest income 750 750 1,500
Rental loss (–0–) (–0–) (23,000)

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 Losses and Loss Limitations 6-13

AGI $43,250 $26,750 $47,000

Itemized deductions:
Medical expenses $ –0– $ 8,500 $ 8,500
Less: 10% of AGI –0– (2,675) (4,700)
All other 9,000 3,400 12,400
Total itemized deductions ($ 9,000) ($ 9,225) ($16,200)
Personal exemptions (4,000) (4,000) (8,000)
Taxable income $30,250 $13,525 $22,800

Tax (rounded) $ 4,076 $ 1,568 $ 2,498

Tax filing separately:

Bonnie’s tax $ 4,076
Jake’s tax 1,568
$ 5,644
Tax filing jointly (2,498)
Tax savings filing jointly $ 3,146

37. (LO 9) Gene is considered a material participant in the tax practice but not in the apartment leasing
operation. However, because he actively participates in the real estate rental activity and owns at least
10%, $25,000 of the $30,000 loss is deductible in the current year against his tax practice income. The
remaining $5,000 loss from the rental activity is suspended as a passive activity loss.

38. (LO 9) Ida can utilize $20,000 of losses and $1,400 of credits as follows because of the real estate rental
activity exception:
Income (Loss): Activity A ($12,000)
Activity B (18,000)
Activity C 10,000
Net loss ($20,000)
Utilized loss 20,000
Suspended loss $ –0–
Utilized credit $ 1,400
Suspended credit $ 700
After deducting the loss of $20,000, Ida has available a deduction equivalent of $5,000 [$25,000
(maximum loss allowed) – $20,000 (utilized loss)]. Therefore, the maximum amount of credits Ida may
claim is $1,400 [$5,000 (deduction equivalent) × 28% (marginal tax bracket)].
39. (LO 9)
Rental loss ($105,000)
Rental income 25,000
Other passive income 32,000
Net passive rental loss ($ 48,000)
Deductible against other income 25,000
Suspended rental loss ($ 23,000)
40. (LO 5, 6, 10) In a disposition by gift of an interest in a passive activity, any suspended losses are added
to the basis of the property. Therefore, Andrea’s basis in the property is $16,000 [$13,000 (Abe’s
basis) + $3,000 (suspended passive losses)]. Abe is not allowed to deduct the suspended losses in the
year of disposition.

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6-14 2016 Essentials of Taxation/Solutions Manual

BRIDGE DISCIPLINE PROBLEMS

1. a. Beginning allowance for bad debts $120,000

Bad debt expense 36,000
Bad debts written off during the year (33,000)
Ending allowance for bad debts $123,000
Given the $33,000 write-off and the $3,000 increase in the allowance for bad debts, the bad debt
expense for financial accounting purposes is $36,000.

b. The bad debt expense for tax purposes is $33,000, the amount of accounts receivable written off
during the current year.

c. The sole book/tax difference for Marketplace relates to the treatment for bad debts.

Bad debt expense per books $ 36,000

Bad debt expense per tax (33,000)
Excess of book expense over tax expense $ 3,000
Therefore, the taxable income for Marketplace is computed as follows:

Before-tax net income for financial accounting purposes $545,000

Excess of book expense over tax expense 3,000
Taxable income $548,000

2. (LO 2, 11) Based on the following, Alternative 2’s benefit exceeds Alternative 1’s by $1,577 ($57,762
− $56,185), primarily because of the flow of the benefits and the effect of the at-risk rules on those
benefits.

Alternative 1
Tax cost/ After-tax 6% PV Present
Income benefit benefit factor value
Year 1 ($20,000) $ 5,000 $ 5,000 .9434 $ 4,717
Year 2 (28,000) 5,000 1 5,000 .8900 4,450
Year 3 72,000 (16,000)2 56,000 .8396 47,018
Total present value $56,185

Alternative 2
Tax cost/ After-tax 6% PV Present
Income benefit benefit factor value
Year 1 ($48,000) $10,000 3 $10,000 .9434 $ 9,434
Year 2 32,000 (6,000)4 26,000 .8900 23,140
Year 3 40,000 (10,000) 30,000 .8396 25,188
Total present value $57,762

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Losses and Loss Limitations 6-15

Footnotes
1 Because of the at-risk rules, Heather’s tax deduction in year 2 is limited to her remaining at-risk
basis of $20,000. The $8,000 loss that is not deductible in year 2 is suspended until her at-risk
basis increases. Therefore, her tax benefit from the deduction is $5,000 ($20,000 × 25%).
2 Heather’s $72,000 share of income increases her at-risk basis and provides the opportunity to
claim the $8,000 suspended loss from the previous year. Therefore, her taxable income for year
3 from this investment is $64,000 ($72,000 − $8,000) and the tax cost is $16,000 ($64,000 ×
25%).
3 Because of the at-risk rules, Heather’s tax deduction in year 1 is limited to her at-risk basis of
$40,000. The $8,000 loss that is not deductible in year 1 is suspended until her at-risk basis
increases. Therefore, her tax benefit from the deduction is $10,000 ($40,000 × 25%).
4 Heather’s $32,000 share of income increases her at-risk basis and provides the opportunity to
claim the $8,000 suspended loss from the previous year. Therefore, her taxable income from this
investment in year 2 is $24,000 ($32,000 − $8,000) and the tax cost is $6,000 ($24,000 × 25%).

3. (LO 3, 11) Option B’s benefit exceeds Option A’s by $7,144 ($21,987 − $14,843) primarily because of
the flow of the benefit and the ability to benefit from the passive loss deductions in years 1 and 2.
Option A
Tax cost/ After-tax 8% PV Present
Income benefit benefit factor value
Year 1 $8,000 ($2,240) $5,760 .92593 $ 5,333
Year 2 8,000 (2,240) 5,760 .85734 4,938
Year 3 8,000 (2,240) 5,760 .79383 4,572
Total present value $14,843

Option B
Tax cost/ After-tax 8% PV Present
Income benefit benefit factor value
Year 1 ($ 8,000) $ 2,240 $ 2,240 .92593 $ 2,074
Year 2 (2,000) 560 560 .85734 480
Year 3 34,000 (9,520) 24,480 .79383 19,433
Total present value $21,987

RESEARCH PROBLEMS

1. The key is to determine in which year the casualty was sustained. Reg. § 1.165–1(a) provides that a
casualty or theft loss is deductible in the year the loss was “actually sustained” but does not clarify what
actually sustained means. Thus, we look to case law for additional guidance. In Oregon Mesabi Corp.
v. CIR, 39 BTA 1033 (1939), appeal dismissed, Com'r v. Oregon Mesabi Corporation, 24 AFTR 458
(109 F2d 1014) (CA 9, 1940), fire killed trees in 1933. However, the timber was rendered worthless
when attacked by insects and fungi in 1934 and 1935. The court determined that a loss deduction was
not necessarily taken in the year of the fire, but in the years, as shown by the evidence, that
worthlessness occurred. As a result, Esther’s loss is deductible in 2015, the year in which the trees died
from disease. Despite the fact that the trees were weakened by the hurricane, they were not worthless
until they died of disease.

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Another random document with
no related content on Scribd:
 jokaisen on elettävä kaunein laulunsa todellisuudeksi, ja
mitä kauniimpi on laulu, sitä raskaampi on elämän arvan
lunastaminen.

ILTARUSKO

Veritas,
minä tahtoisin suudella sinua,
ja se suudelma olisi kuin iltarusko,
joka äsken kuvastui syviin vesiin.

Virta kulki vuolaana, mustana, ylpeänä voimastaan,

varmana määrästään, yksinäisenä. Valahti taivaan rannalle
hehkuva iltarusko, painoi punaisen suudelman tummiin vesiin.

Ja katso! Syvyys alkoi liekehtiä lämpimänä, riemuitsevana.

Niin syvälle kuin silmä kantoi alaspäin, näkyi vain iltaruskon
hehkua, niin kauas kuin virta vieri, väikkyi purppurainen
veriaalto, mereen asti se ulottui. Ympärillä rannat hymyilivät ja
kukat nyökyttivät päätään.

Veritas,
minä tahtoisin olla sinulle iltarusko,
sillä sinä olet yksinäinen, voimakas ihminen,
joka elät syvää elämää
ja katsot hetken lapsiin alaspäin.
Minä tahtoisin kuin iltarusko
painaa oman vereni punaisen hehkun sinuun,
 niin että se ulottuisi sisimpääsi asti
ja täyttäisi olemuksesi elämisen riemulla.

Veritas,
minä tahtoisin suudella sinua —

KIELONKUKKIA

Herätkää, kielonkukat, avatkaa kellonne!

Armas astuu ylitsenne,
ja hänen silmistään säteilee lämmin aurinko.
Herätkää, kielonkukat, avatkaa kellonne!

Tuoksukaa, kielonkukat, tuoksukaa kesää!

Armas astuu ylitsenne,
ja hänen huuliaan polttavat suudelmat,
joiden aika nyt on käsissä.
Tuoksukaa, kielonkukat, tuoksukaa kesää!

Kuolkaa, kielonkukat, kuolkaa ilman kaipausta! Armas astui

ylitsenne ja kosketti minua huulillaan. Minun sieluni ja ruumiini
tunsi hänet ja tervehti valtiastaan.

Kuolkaa, kielonkukat, kuolkaa ilman kaipausta!

SUUDELMA
 Veritas, sinä suutelit minua
kuin ruumiinsa verille ruoskinut hurskas
Pyhää Neitsyttä:
kunnioittavin, aroin huulin.
Sinä suutelit minua uudelleen
kuin erakko,
joka luopuu maailmasta ja lähtee korpeen:
alistuen.
Ja minä otin suutelosi vastaan mitään ymmärtämättä,
mutta tuntien kaikki kuoleman edelliset kauhut.

Veritas, silloin kävi lävitseni aavistus, ikäänkuin voisin

minäkin tuntea sen Kaikkivaltiaan Voiman, josta Kirjojen Kirja
sanoo: »Ei etsi omaansa, ei katkeroidu.»

Veritas — minä, minä soisin, että sinä olisit krusifiksi, jota

voisin alati kantaa povellani, palvoa hartaudessa, löytää levon
sielulleni antaumuksessa — ja suudella syntisin, janoisin
huulin päivin ja öin —

VASTAAMATTA JÄÄNYT KYSYMYS

Miksi olet niin kalpea tänään? kysyit.

En voinut vastata, enhän tiennyt sitä itsekään; tunsin vain

epämääräistä tuskaa rinnassani ja pyysin: Mene!

Ystävä:
minussa kehittyy jokin, jolle en löydä nimeä,
 jokin sanomattoman suloinen ja surullinen,
joka nostaa kyyneleet silmiini ja hymyn huulilleni,
jota en soisi kenenkään arvaavan
ja josta tahtoisin laulaa koko maailmalle,
jokin, josta en tiedä,
onko se Elämän vaiko Kuoleman lähetti.

YÖSSÄ

Yö äänetön ympärilläni, kädet viileät painaa se otsallein. Mitä

tein, mitä päivän tein? kysyn kyynelin itseltäni.

Meni aurinko mailleen kauan sitten.

Hyvä on.
Ah, eessä sen säteitten kirkkahitten
olen alaston:
olen tahrannut valkean vaippani lokaan,
olen pettänyt parasta itseäni,
olen kieltänyt Pyhän,
olen veljilleni ollut tyly,
ah, ylitse käynyt oon käskyt kaikki.

Meni aurinko mailleen kauan sitten.

Yks synti mua painaa kuin kuoleman taakka: sydämeen,

joka lempii mua, olen pistänyt okaan —

Miks tein, miks väärin tein? kysyn murheisna itseltäni. Ja

mä katselen kylmiä tähtiä ikkunasta: kuin nuo ovat vakavat,
 niin oli rakkautein.

Yö tummuu ympärilläni.

LÄHTIESSÄ

Sinun käsivarsiltasi tahtoisin kerran, kun hetki on tullut, siirtyä

rajan taakse.

Ruumiini on hauras kuin lasi, ja sieluni on siinä; perin

heikoilla siteillä kiinni. Luulenpa, että keväinen tuulenpuuska
voisi ne eroittaa toisistansa.

Kuljen täällä unissakävijän tavoin. Teen vaistomaisesti

samaa kuin muutkin, mutta kotonani en ole. Olen kuullut
kutsun, tosin loitolta, olen tuntenut Näkymättömän
läheisyyden enkä ole enää entiseni.

Mutta sinä hetkenä, Veritas, tahtoisin levätä sylissäsi,

tahtoisin haihtuvan tuokion ajan uskoa sinun rakastavan
minua yli kaiken maallisen, tahtoisin, että viimeinen, minkä
katoava tajuni tältä puolen rajan käsittää, olisit sinä.

KUVASTIN

Ystävät, jos luotatte minuun, niin luottakaa eheästi.

Olen luotu niin, että vastaan samalla mitalla.
Jos te ette ole rehellisiä, miksi vaaditte sitä minulta?
Ellette te anna kokonaista, kuinka voisin minä sitä antaa?
Ystäväni, ettekö jo aikaa huomanneet:
heijastan teille jokaiselle vain itseänne.
EPILOGI

RESIGNAATIO

Ketä Jumala rakastaa, sen käteen hän laskee matkasauvan,

se kuulee pakottavan kutsun: »Lähde maaltasi ja isäsi
huoneesta sille maalle, jonka minä sinulle osoitan!»

Ketä Jumala rakastaa, sen tie vie avaraan maailmaan.

Ikuinen ikävä ajaa häntä. Lepopaikkaan ei hän jäädä voi.
Päämäärä odottaa häntä jossakin kaukana, jonne vain
aavistus yltää.

Ketä Jumala rakastaa, sen sydän on helisevä harppu.

Kaikki muuttuu siinä säveliksi, ilon kultasoinnuiksi tai surun
hopeisiksi. Väliin ne soivat ilmi. Ken ymmärtää, hänen
harppunsa virittyy samaan sointuun. Ken ei ymmärrä, kulkee
kuurona ohi.

Ketä Jumala rakastaa, hän ei ole onnellinen eikä onneton.

Suuri Tyytymys vallitsee häntä. Hän on uusi ihminen, joka
entisyytensä unohtaen taivaltaa kohti lupauksen
Kaanaanmaata.
 *** END OF THE PROJECT GUTENBERG EBOOK KUVASTIN ***

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