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Concepts in Federal Taxation 2013 Murphy 20th Edition Solutions Manual
Concepts in Federal Taxation 2013 Murphy 20th Edition Solutions Manual
Instructor’s Manual
Ch 7: Losses – Deductions and Limitations
Many of the classification rules for deductions also apply to losses. Deductions are current
expenditures made for the production of current income. Losses result when an entity's
deductions exceed the income generated, or when the disposition of an asset results in
less than a full recovery of the asset's capital investment.
Free-Writing Assignment: Discussion Question 2 offers a good starting point for the
chapter. Ask students to provide examples of each type of loss along with their discussions
of the basic differences between annual and transaction losses.
Teaching Tip #1: Students may have difficulty understanding the relationship of
deductions and losses. You might want to spend some time on Discussion Question 1.
Teaching Tip #2: Comprehensive Problem 92 covers most of the salient issues
discussed in Chapter 7. It can be used as a good summary of this chapter and also makes
a good exam question.
Writing assignments Suggested problems to use for writing integration include Problems
19, 44, 49, 59, 62, and 69; and Tax Planning Case 97.
Alternative Writing Assignment: The following is a fun case concerning the question of
what is a casualty for tax purposes:
Assume you are an accountant in the tax department of Rubley, Musgrave, and
Elway, CPAs. Last Saturday morning you were in Watchill's Donuts, as is your
norm. Just as you finish reading Doonesbury and start on your second apple
fritter, a gentleman sits down beside you. He introduces himself as Fred O.
McDonald, a farmer from Wiggins. He says he recognizes you as "that CPA who
frequents the donut shop." Fred has a problem and asks tax advice from you.
Last Tuesday farmer McDonald planned to remove stumps from a pasture. So,
he drove out to the pasture, lit a stick of dynamite and tossed it near the base of
a stump. Fred's playful dog Boomer saw his master throw the "stick" and
scampered to fetch it. As Boomer picked up the stick, Fred yelled at the dog.
Boomer, thinking he was going to be punished, ran under Fred's pickup truck
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where he dropped the dynamite stick. The dog escaped harm just as the truck
was totally destroyed by the blast.
Fred wonders if he can deduct the loss of the truck for tax purposes. Draft a letter to
Fred O. McDonald to answer his question.
Lecture Outline
I. Annual losses, also called activity losses, are contrasted with transaction losses
(Examples 1 and 2)
A. Use Figure 7-1 as a summary schematic for the treatment of all losses.
Figure 7-2 shows the treatment of annual losses.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted 2
to a publicly accessible website, in whole or in part.
Instructor’s Manual
Ch 7: Losses – Deductions and Limitations
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted 3
to a publicly accessible website, in whole or in part.
Instructor’s Manual
Ch 7: Losses – Deductions and Limitations
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted 4
to a publicly accessible website, in whole or in part.
Instructor’s Manual
Ch 7: Losses – Deductions and Limitations
VI. Active participant exception allowed for taxpayers not meeting real estate
professional test (Figure 7-3; Problems 30 to 34; Examples 27 and 28)
A. Taxpayer owns at least a 10% interest in the activity -- thus, excludes
investments in real estate investment trusts and other large "deals"
B. Significant and bona fide involvement is necessary
1. Only means keeping records,
2. Arranging financing,
3. Collecting rents, or simply
4. Arranging for a management service to do these.
C. Permits up to $25,000 loss deductions annually, unless not a "middle-income"
taxpayer
1. Deduction amount reduced for taxpayers otherwise qualifying, but
having AGI between $100,000 and $150,000 ($25,000 maximum is
reduced 50 cents for each dollar of AGI)
2. For AGI over $150,000, no loss deduction
3. Any excess over the $25,000 limit can be carried forward to a
subsequent year
D. Dispositions permit suspended PAL to be deductible
1. By Sale (Problem 39; Examples 29 and 31)
a. Consistent with the legislative intent of getting rid of abusive tax
shelters -- release of the suspension is an incentive
b. Frees the suspended loss of the sold activity to be released and
used to offset income any other classification
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to a publicly accessible website, in whole or in part.
Instructor’s Manual
Ch 7: Losses – Deductions and Limitations
VII. Transaction Losses result from a single disposition of property (Problems 45 and
46)
A. Figure 7-4 provides a summary
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted 6
to a publicly accessible website, in whole or in part.
Instructor’s Manual
Ch 7: Losses – Deductions and Limitations
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted 7
to a publicly accessible website, in whole or in part.
Instructor’s Manual
Ch 7: Losses – Deductions and Limitations
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted 8
to a publicly accessible website, in whole or in part.
Instructor’s Manual
Ch 7: Losses – Deductions and Limitations
Annotated Bibliography
LOSSES CAN BE TRICKY by Leonard G. Weld and Michael L. Holland, 93 Strategic Finance 10, 12,
61 (July 2011)
The tax treatment of losses on the sale of securities is more complex than the treatment of
gains because of restrictions and limitations such as related party and wash sale rules
CLAIMING PASSIVE ACTIVITY CREDITS by Albert B. Ellentuck, The Tax Adviser (August 2007)
www.aicpa.org/pubs/taxadv/online/aug2007/casestud.htm
A case study to determine whether a passive activity credit can be taken by an individual
shareholder of S Corporation stock.
LOSSES TRUST DEDUCTED WERE NOT FROM PASSIVE ACTIVITY by Claire Y. Nash, Journal of
Accountancy Online (November 2003), www.aicpa.org/pubs/jofa/nov2003/taxcases.htm#losses
A discussion of Mattie K. Carter Trust v. United States, 256 F Supp 2d 536 (Tex. 2003).
EMERGING AUDIT ISSUES IN THE APPLICATION OF THE PASSIVE LOSS PROVISIONS TO REAL
ESTATE by Patricia Eason, Tim Krumwiede and Raymond A. Zimmerman, 75 Taxes - The Tax
Magazine 575 - 580 (Oct. 1997)
The provisions for Passive Losses and the new audit issues are discussed.
NONRECOURSE DEBT REVISITED, RESTRUCTURED AND REDEFINED by Linda Sugin, 51 Tax Law
Review 115-74 (Fall 1995).
Suggests that the current legal foundation for the tax treatment of nonrecourse debt (which
treats debt as a true obligation) is flawed, in that it does not reflect economic reality or
correctly measure income. Recommends redefining nonrecourse debt as an investment by the
lender.
LOSS DEDUCTIONS by John Harllee, Jr. and John C. McCoy, Jr. Tax Management U.S. Income
Series Portfolio No. 527, 1994, 188 pages.
Detailed analysis of what constitutes a realized and identifiable loss and of who is entitled to
claim a loss. Also, addresses specific losses, such as abandonment, war and confiscation
casualty, theft, and wagering losses.
1993 TAX LEGISLATIVE CHANGES TO THE PASSIVE ACTIVITY LOSS RULES by Richard M. Lipton.
Taxes: The Tax Magazine, Oct 1993, vol 71, n10, p 611-619.
Changes allow full-time real estate developers to offset income with passive losses just as
other business can. These changes provide tax equity concerning passive losses while
preventing tax shelters.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted 9
to a publicly accessible website, in whole or in part.
Concepts in Federal Taxation 2013 Murphy 20th Edition Solutions Manual
Instructor’s Manual
Ch 7: Losses – Deductions and Limitations
DEDUCTING BOTH BUSINESS AND PERSONAL CASUALTY LOSSES Profit-Building Strategies for
Business Owners, March 1990, vol 20, n3, p 7(2).
Defines casualty and involuntary conversion. What information you will need for the IRS.
Explains how to figure fair market value and when to take the deduction.
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to a publicly accessible website, in whole or in part.