Leah Pasternak Federal Taxation ACC307 Chapter 11: Investor Losses Homework Submission 2.

. Ken is at risk for his $200,000 cash that he invested into the company plus his share of the recourse debt, $75,000, for a total at-risk amount of $275,000. 14. The IRS has the right to regroup activities when both of the following conditions exist: The taxpayers regrouping fails to reflect one or more appropriate economic units. One of the primary purposes of the taxpayers grouping is to avoid the passive loss limitations. 15. The term material participation is significant from the taxpayers perspective because losses from a non-rental activity in which the taxpayer materially participates can offset active and portfolio income. Material participation is determined by the level of participation of the taxpayer in the activity. The underlying theory is that a high enough level of participation indicates that the taxpayer has an interest in the activity other than as an investment. The taxpayer who materially participates in the activity has both an economic interest in the activity and an interest in the activity as an ongoing source of livelihood. 27. Some of the tax issues that the Waylands could be facing are: The Tax Shelter problem. At-Risk limits. Would Doug and Debbie be treated as material participants in the venture? If the passive activity rules apply instead, what amount may be deducted in the current year and what amount is suspended under the passive loss rules for future use? What is the interaction between the at-risk rules and the passive activity rules in determining the current treatment of losses flowing from the investment? 36. Hazels total of suspended losses from these two activities is $16,000.00, however she will not be able to deduct this because the losses are carried forward for use in future years. 39. Between the two options it would be best for Emily to choose option B because the benefits exceed option A by $7,144.00. The two investment alternatives are listed below: Option A Income Tax Cost After Tax Benefit PV Factor Present Value Year 1 Year 2 Year 3 8,000 8,000 8,000 (2,240) (2,240) (2,240) 5,760 5,760 5,760 0.92593 0.85734 0.79383 5,333 4,938 4,572 $14,843 Present Value 2,074 480 19,433 $21,987

Option B Year 1 Year 2 Year 3

Income (8,000) (2,000) 34,000

Tax Cost 2,240 560 (9,520)

After Tax Benefit 2,240 560 24,480

PV Factor 0.92593 0.85734 0.79383

42. Sarah has a net gain of $10,000 from the sale of activity D. She can offset the $8,000 suspended loss from the activity and the current years loss of $1,500 from the activity against the $10,000 gain. She can also take the remaining net gain of $500 from the sale and use it to absorb passive losses from her other activities. 55. Bonnie and Jake should definitely file jointly for 2012. 61. The tax affects to Nina and her son in 2011 and 2012 are that Nina loses her suspended losses of $25,000 and they become part of the property that she gave to her son. In 2011 Ninas sons passive activity has an adjusted base of $125,000. In 2012 he has to report income of $12,000, however he is unable to offset Ninas $25,000 of suspended losses. 63. January 1, 2012 Kathleen Tweady 11934 Briarpatch Drive Midlothian, VA 23113 Dear Ms. Tweady, Per our meeting regarding tax planning strategies and alternatives, I have drawn out the following plan and options for you. The deduction for investment interest is limited to the amount of investment income reported. If you choose not to treat the capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, your deduction will be $7,500. However, if you elect to treat these items as investment income, the deduction becomes $25,500 ($7,500 interest + $6,000 qualified dividends + $12,000 capital gain). The maximum rate applicable to the capital gain and qualified dividends is 15%, while other income may be subject to rates as high as 35%. If treated as investment income, the $12,000 capital gain and $6,000 of qualified dividends will not qualify for the beneficial tax rate of 15%. Therefore, you must decide between the tax benefit of an additional deduction of $18,000 ($6,000 + $12,000) versus the benefit of the applicable reduced rates. Please call me at (407) 849-0044 to schedule an appointment and to further discuss these options that I have set forth for you. Thank you for consulting me on this matter and I look forward to serving you in the near future. Sincerely,

Leah Pasternak