Question 1

The vacation home limitations of Section 280A may also apply to boats and mobile homes.

Accepted Answer

The term "dwelling unit" is very expansive and is based on whether the property provides shelter and accommodations for eating and sleeping.

Question 2

Efrain owns 1,000 shares of RJ Inc.common stock which he purchased three years ago for $36,000.Efrain sells the 1,000 shares on October 15,2017,for $10,000.On November 12,he purchases 400 shares of RJ Inc.preferred stock for $8,000.Efrain's recognized loss on the sale of the 1,000 shares will be

Accepted Answer

D) Preferred stock is not considered substantially identical to common stock of the same corporation and wash sale rules will not apply. Therefore, the loss of $26,000 ($10,000 - $36,000) is allowed.

Question 3

Erin,Sarah,and Timmy are equal partners in EST Partnership.Sarah also owns 40% of Elton Corporation.The remaining shareholders of Elton Corporation are: Erin (24%) and Sarah's uncle (36%).What percent ownership does Sarah directly or constructively own in Elton Corporation?

Accepted Answer

B) Sarah directly owns 40% and constructively owns Erin's (her partner) 24% of the stock, but not her uncle's stock.

Question 4

If property that qualifies as a taxpayer's residence is rented for less than 15 days per year,the taxpayer includes no rental income in gross income and similarly may claim no expenses related to the property other than interest and taxes.

Accepted Answer

Rental of a personal residence for less than 15 days is considered nominal. Rental receipts are not recognized, nor are rental-related expenses deductible (other than the regular itemized deductions for mortgage interest and property taxes).

Question 5

Expenses related to a hobby are deductible only to the extent of the gross income from the hobby.

Accepted Answer

As hobbies are not primarily pursued for profit, the losses cannot be recognized.

Question 6

Which of the following individuals is not considered a relative for purposes of the related parties loss disallowance rules under Sec.267?

Accepted Answer

C) A husband, brother, and grandfather are all considered related parties under Section 267, and any loss on a sale to them would be disallowed.

Question 7

Which of the following factors is not used to determine whether an activity is a hobby or a business?

Accepted Answer

D) Success in dissimilar activities would not be relevant.

Question 8

If an activity produces a profit for at least two years during a consecutive five-year period,the burden of proof shifts to the IRS to show that the activity is not profit-motivated.

Accepted Answer

The time period is three out of five years.

Question 9

Rob sells stock with a cost of $3,000 to his daughter for $2,200,which is its fair market value.Later the daughter sells the stock for $3,200 to an unrelated party.Which of the following describes the tax treatment to Rob and Daughter?

Accepted Answer

B) The $800 ($2,200 - $3,000) loss on Rob's sale to his daughter is disallowed under the related party transaction rules. His daughter's subsequent sale at a $1,000 gain ($3,200 - $2,200) may be reduced by Rob's $800 disallowed loss resulting in a gain to his daughter of $200 ($1,000 gain - $800 loss).

Question 10

Bart owns 100% of the stock of Octo Corporation,which uses the accrual method.Bart's sister Samantha,a cash-method taxpayer,did some advertising work for Octo in November 2017.In December,Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2018.Samantha is a calendar-year taxpayer.When may Octo deduct the $5,000?

Accepted Answer

B) Octo and Samantha are related parties under the constructive ownership rules of Section 267. Octo may not take a deduction until Samantha recognizes the $5,000 in income.

Question 11

Generally,Section 267 requires that the deduction of unpaid (accrued) expenses be deferred until the year in which the related payee recognizes the amount as income.

Accepted Answer

An accrual-basis taxpayer cannot deduct accrued expenses owed to a cash-basis related party.

Question 12

Donald sells stock with an adjusted basis of $38,000 to his son,Kiefer,for its fair market value of $30,000.Kiefer sells the stock three years later for $32,000.Kiefer will recognize a gain on the subsequent sale of

Accepted Answer

A)
 11ea7e84_1f0e_603c_9a0a_599d69d22c8e_TB1260_00 The previously disallowed loss cannot reduce the gain below zero.

Question 13

Sheila sells stock,which has a basis of $12,000,to her daughter for $7,000,the stock's fair market value.Subsequently,the daughter sells the stock to an unrelated party for $5,000.Which of the following is true for Sheila and her daughter?

Accepted Answer

A) The $5,000 ($7,000 - $12,000) loss on Sheila's sale to Daughter is disallowed under the related party transaction rules. Her daughter's subsequent sale at a $2,000 loss, however, is recognized. The disallowed loss incurred by Sheila can only be used to reduce her daughter's subsequent gain, not loss.

Question 14

The term "principal place of business" includes a home office used by a taxpayer for administrative or management activities of the business if no fixed location exists where the taxpayer conducts these activities.

Accepted Answer

The term "principal place of business" includes a home office used by the taxpayer for administrative or management activities of the business if no other fixed location exists where these activities are performed.

Question 15

Hobby expenses are deductible as for AGI deductions.

Accepted Answer

Hobby-related expenses, to the extent allowed, are itemized deductions.

Question 16

Jason sells stock with an adjusted basis of $66,000 to JJ Inc.,his 60% owned corporation,for its fair market value of $60,000.JJ Inc.sells the stock three years later for $67,000.JJ Inc.'s recognized gain or loss on the sale will be

Accepted Answer

C)
 11ea7e84_1f0e_603b_9a0a_890afcaf3f95_TB1260_00

Question 17

Victor,a calendar-year taxpayer,owns 100 shares of AB Corporation stock,which was purchased three years ago for $5,000.Victor sells all 100 shares on December 27,of the current year,for $4,000 and on January 5,of the following year,purchases 60 shares of AB Corporation stock.Victor's recognized loss will be

Accepted Answer

B) (40/100) × ($5,000 - $4,000) = $400. The wash sale rules limit the loss recognition to the loss on the shares that are not repurchased.

Question 18

Chana purchased 400 shares of Tronco Corporation stock for $40,000 in 2014.On December 27,2017,Chana sells the 400 shares for $24,000.Chana purchases 300 shares of Tronco Corporation stock on January 16,2018 for $8,000.Chana's recognized loss on sale of the 400 shares in 2017 and her basis in her 300 new shares are

Accepted Answer

B) The realized loss on the 400 shares is $16,000 ($24,000 - $40,000). $16,000 × 300/400 = $12,000 is disallowed due to the wash sale. $16,000 - $12,000 = $4,000 allowed loss in 2017. The basis of the new shares is the $8,000 cost plus the $12,000 unrecognized loss = $20,000 basis in new stock.

Question 19

Dana purchased an asset from her brother for $15,000.Her brother's basis was $20,000.If Dana sells the asset to an unrelated party for $12,000,she will recognize

Accepted Answer

C)
 11ea7e84_1f0e_874d_9a0a_b5b0a4798729_TB1260_00 Because she realized a loss on the sale of the asset, she cannot apply her brother's disallowed related party loss.

Question 20

Expenses attributable to the rental use of a taxpayer's personal residence are limited to the gross income generated by the property.

Accepted Answer

A net loss cannot be recognized on a vacation home.

Quiz 6: Deductions and Losses