CPA-Regulation Exam Preparation Material | AICPA CPA Regulation

Explanation:
Choice "c" is correct. Interest earned on Series EE bonds issued after 1989 may qualify for exclusion. One requirement is that the interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in higher education. The interest exclusion is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).

Explanation:
Choice "b" is correct. An investment in a capital asset (e.g., stock) results in the income being capital (either a capital loss or a capital gain). Ownership percentage is not a factor in the calculation, and, in this question, nor is the fact that the corporation is not an S corporation. The calculation is simple:
Wallace invested $25,000 in the stock and received $200,000 for 100% of his investment 15 years later.
The capital gain is $175,000 ($200,000 - $25,000), and it is considered long-term because the stock was held for greater than one year.
Choice "a" is incorrect. There is $175,000 of gain on the transaction ($200,000 - $25,000). This type of transaction is not a transaction that is excluded from tax in the tax code.
Choice "c" is incorrect. An investment in a capital asset (e.g., stock) results in the income being capital (either a capital loss or a capital gain). Although the calculation of the income is correct (i.e., $175,000), ordinary income is not the proper treatment for this transaction.
Choice "d" is incorrect. Although this transaction does result in a long-term capital gain, Wallace has basis in the stock ($25,000), and the gain is calculated as the proceeds from the sale ($200,000) less the basis in the stock.

Explanation:
Choice "c" is correct. Wolf's passive loss for 1989 is $5,000 ($100,000 operating loss × 5% interest in partnership).
Choice "a" is incorrect. Wolf did not materially participate in the partnership, so the loss was passive. Choice "b" is incorrect. Wolf's passive loss of $5,000 could not be reduced by his distributive share of the partnership's "interest income" totaling $1,000. Interest income is considered "portfolio income," and neither the partnership nor a partner can offset it against passive losses.
Choice "d" is incorrect. No items of income or deduction from portfolio income or activities in which the taxpayer materially participates may be combined or offset with passive losses unless the activity generating the loss is completely disposed of in a taxable transaction.

Explanation:
Choice "c" is correct. Because the second property was personally used more than 14 days, any net loss from the rental of the property will be disallowed.
All related expenses must be prorated between the personal use portion and the rental activity portion.
Prorated depreciation is permitted for the rental activity.

Explanation:
Choice "a" is correct. In 1992, no sale of stock occurred so there would be no loss. In 1993, there is a $2,000 loss realized ($15,000 basis less $13,000 received), but it is not deductible because it is a wash sale. A wash sale occurs when a taxpayer sells stock at a loss and invests in substantially identical stock within 30 days before or after the sale. In this case, Smith reinvested in an additional 100 shares four days prior to selling 100 shares of the same stock at a loss. The $2,000 disallowed loss would, however, increase the basis of the new shares by $2,000.
Choice "b" is incorrect. The $2,000 loss realized in 1993 is disallowed under the wash sale rules. Choice "c" is incorrect. In 1992, there is no loss since no shares were sold. In 1993, the $2,000 loss is disallowed under the wash sale rules.
Choice "d" is incorrect. In 1992, there is no possible loss since no shares were sold.