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Chapter 7--Losses: Deductions and Limitations
Student: ___________________________________________________________________________
1. Match each statement with the correct term below.
1. Passive Any asset that is not a receivable, inventory, or

activity depreciable or real property used in a trade or business. ____
2. Net operating
loss Limited to $3,000 annually for individuals. ____
3. Transaction A loss that results from some sudden, unexpected, or
loss unusual event. ____
An excess of business deductions over business
4. Capital loss income. ____
A trade or business in which the taxpayer is not a
5. Capital asset material participant. ____
6. Casualty loss When an asset is disposed of for less than its basis. ____
1. NOL Owns at least a 10% interest and is significantly

carryforward involved in the rental activity. ____
Cash or other assets contributed plus recourse debts
2. At-risk amount of the activity. ____
3. Small business The amount of the loss for fully destroyed property
stock is the property's adjusted basis. ____
Management is left to at least one general partner
whose liability is not limited and who is responsible for
4. Recourse debt the on-going activities of the business. ____
5. Material Involved in a rental activity for more than 500 hours
participant in a year. ____
The loss may be used to offset income from prior
6. NOL carryback periods. ____
7. Business
casualty loss The loss is used to offset income in future periods. ____
8. Limited A liability that is only secured by the underlying
partnership property. ____
The amount of loss is limited to the lower of the
9. Nonrecourse property's adjusted basis, or the reduction in fair market
debt value. ____
10. Personal
casualty loss A loss that is generally not deductible. ____
11. Personal-use
loss The borrower is personally liable for the debt. ____
12. Active A type of stock that receives some ordinary loss
participant treatment. ____
3. An operating loss occurs when an entity's deductions exceeds the income generated for the period.
True False
4. A transaction loss occurs when an asset is disposed of at less than its basis.
True False
5. A corporation has a net capital loss. The significance of a net capital loss in 2012 for a corporation is that it
can be carried back 3 years and carried forward 5 years by a corporation to offset capital gains in other taxable
years.
True False
6. The term tax shelter refers to investment property that involves residential and commercial real estate.
True False
7. Lu-Yin purchased her consulting business with $75,000 of her own funds and she borrowed $125,000 from
the local bank. If she is personally responsible for the loan, she is at risk only for $50,000.
True False
8. Material participation requires that an individual participates in an activity for more than 200 hours per year
or spends more than 50 hours a year in the activity and the time spent is more than anyone else spends on the
activity.
True False
9. Virginia owns a business that rents power equipment to construction companies. Despite maintaining,
delivering, and picking up the equipment, Virginia's business is passive since it is a rental activity.
True False
10. While most rental activities are classified as passive, an exception is low-income housing.
True False
11. Portfolio income consists of unearned income from dividends, interest, royalties, annuities, and other assets
held as investments.
True False
12. A closely held corporation cannot offset net passive losses against income of the business.
True False
13. Dwight owns an apartment complex that has a $30,000 loss. His adjusted gross income is $85,000 before
the loss. Since he qualifies as an active participant he may deduct $25,000.
True False
14. Leon is allowed to deduct all the current and suspended losses on his passive activity if he sells his entire
interest in the passive activity during the year.
True False
15. John discovers that termites have destroyed the front porch of his office building. The damage occurred over
a 3-year period. He is eligible for a casualty loss deduction.
True False
16. The Baskerville Corporation has a net $6,500 capital loss during the current taxable year. They will be able
to deduct $3,000 this year and carries the remaining $3,500 forward.
True False
17. Any corporate capital loss not used in the current year can be carried back 2 years and carried forward 20
years to offset capital gains in those years.
True False
18. Constance owns a boutique. During the current year, she has gross income of $400,000 and allowable
deductions related to the business of $425,000.
I. Constance has incurred a transaction loss, which represents her unrecovered cost of capital.
II. Constance has suffered an annual loss, which may be carried back 2 years or forward 20 years if not used in the current year.
A. Only statement I is correct.

B. Only statement II is correct.
C. Both statements are correct.
D. Neither statement is correct.
19. Barry owns all of the stock of Jerrico Corporation; an internet based gaming firm. Barry is also the President
of and works full-time for Jerrico. During the current year, Jerrico has a loss of $125,000 from its operations.
I. If Jerrico is an S Corporation, Barry may deduct the loss on his personal tax return as a deduction for AGI.
II. If Jerrico is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20
years.

20. Perry owns all of the stock of Sound Corporation. Perry is also the President of Sound and works full-time
running Sound. During the current year, Sound has a loss of $75,000 from its operations.
I. If Sound is an S Corporation, Perry deducts the loss on his personal tax return as a deduction from AGI.
II. If Sound is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20
years.

21. Kenneth owns all of the stock of Kearney Corporation. Kenneth is also the President of Kearney and works
full-time running the corporation. During the current year, Kearney has a loss of $40,000 from its operations.
I. If Kearney is an S Corporation, the corporation may carryback the loss 2 years (and obtain a refund of taxes paid) with any
remaining loss carried forward 20 years.
II. If Kearney is a regular corporation, Kenneth may deduct the loss for AGI on his personal tax return because the corporation is a flow
through entity.

22. Baker Corporation suffers a net operating loss (NOL) of $65,000 in 2012. Baker was incorporated in 2010.
Baker had a NOL of $20,000 in 2010 and taxable income of $35,000 in 2011. The corporation expects a taxable
income of $200,000 in 2013. What valid alternatives are available to Baker concerning the $50,000 loss?
I. Baker can carryback the loss to 2011 and will receive a refund of $2,250.
II. Baker can elect to carryforward the loss and expect to receive tax savings of $19,500.
23. Carmen purchased a business for $150,000 by investing $40,000 of her own funds and borrowing $110,000
from Local National Bank. Carmen signed the note payable as a personal guarantor. In the first year of
operations the business had an operating loss of $120,000. During the second year, the business has an
operating loss of $45,000. How much of the year two loss is deductible against Carmen's income from other
business activities? Assume that Carmen materially participates in the business.
A. $ - 0 -
B. $ 15,000
C. $ 30,000
D. $ 45,000
E. $120,000
24. Sullivan, a pilot for Northern Airlines, has adjusted gross income of $92,000 before considering the
following losses. The passive activity rules disallow the deduction for a loss in which of the following?
I. Sullivan has a $4,500 loss from his ownership interest in Cowco, a feeder-cattle limited partnership. Sullivan is a general partner and
is responsible for day-to-day management decisions.
II. Sullivan has a $7,000 loss from his ownership interest in Swineco, a feeder-pig limited partnership. Sullivan is a limited partner.

25. Maria, an engineer, has adjusted gross income of $167,000 before considering the following losses. The
passive activity rules disallow the deduction for the loss in which of the following?
I. Maria has a $21,000 loss from her ownership of Family Apartment Village, a low-income housing project.
II. Maria owns and actively participates in managing a rental house across the street from East State College. This activity generates a
$7,000 loss in the current year.

26. If an individual is not a material participant, a rental activity is considered passive. However, certain rental
activities are not deemed to be rentals for passive loss purposes even if the individual is not a material
participant. Which of the following is not excluded from the passive loss rules?
A. Golf cart rentals.
B. Hotel rooms.
C. Jet ski rentals.
D. Apartment rentals.
E. Construction equipment rentals.
27. Pedro owns a 50% interest in a limited partnership that operates an apartment complex. During the current
year, the partnership generates a taxable rental loss of $42,000. Pedro's other sources of income are salary of
$55,000 and interest of $18,000. What is Pedro's allowable loss from the apartment?
A. $ - 0 -
B. $18,000
C. $21,000
D. $25,000
E. None of the above.
28. Jose, Mahlon, and Eric are partners in New Communications Partnership. Jose owns a 50% interest, Mahlon
owns a 35% interest, and Eric owns a 15% interest. During the current year (the first year of operation for the
enterprise), the business has a loss. Although the partnership is established as a general partnership, Jose
functions as the manager and performs all of the day-to-day duties of a chief operating officer. Mahlon and Eric
are merely investors who receive monthly reports about the business. At the close of the current tax year, each
partner will receive a share of the partnership loss. Which of the partners will be able to deduct his (their) share
of the partnership loss?
I. Jose
II. Mahlon
III. Eric
A. Mahlon
B. Jose, Mahlon, and Eric
C. Jose
D. Jose and Mahlon
E. Mahlon and Eric
29. During 2012, Pamela worked two "jobs." She performed financial consulting activities for 1,000 hours and
real estate development and rental activities for 1,200 hours. Her real estate development and rental activities
produced a loss of $35,000. Her financial consulting generated a net business income of $40,000. How much of
the loss can Pamela deduct against her financial consulting income?
A. $ - 0 -
B. $17,500
C. $25,000
D. $35,000
E. $40,000
30. During the current year, Alyssa incurred a net loss of $27,500 from a 5 percent interest in a partnership that
operated and managed an office building. Alyssa had adjusted gross income from other sources of $110,000 and
spent 67 hours assisting in the management of the building. Determine Alyssa's total adjusted gross income for
the current year.
A. $ 82,500
B. $ 90,000
C. $100,000
D. $105,000
E. $110,000
31. Kenzie and Ross equally own rental real estate. The rental property generated a loss of $20,000. Kenzie is
also employed as a part-time Tupperware salesperson and full time as a real estate agent. For her share of the
loss to be fully deductible, she must:
I. Not have an adjusted gross income in excess of $100,000.

II. Spend more than 750 hours, in total, as a realtor
III. Spend more than 100 hours managing the rental activity, and spend more time then Ross.
IV. She must spend more than 50% of her time as a realtor and must own more than 5% of the real estate agency.

C. Statements I and II are correct.
D. Statements II, III, and IV are correct.
E. Statements I, II, III, and IV are correct.
32. Travis is a 30% owner of 3 rental houses. He spends 625 hours a year managing the properties. In addition,
he owns a 20% interest in a real estate business to which he devotes 1,800 hours a year. The rental units
generate a total loss of $22,000, and Travis' adjusted gross income in the current year, before considering the
rental properties, is $120,000. How much of the loss can Travis deduct?
A. $ - 0 -
B. $ 4,500
C. $ 6,600
D. $15,000
E. $22,000
33. Susan is the owner of a 35-unit apartment complex. She spends 950 hours a year managing the property. In
addition, she works part-time for a mortgage company. She spends 1,150 hours a year as a bookkeeper at the
mortgage company. The apartment complex generated a loss of $32,000, and Susan's adjusted gross income for
the current year, before considering the apartment complex, is $48,000. How much of the loss can Susan
deduct?
A. $ - 0 -
B. $14,476
C. $16,727
D. $25,000
E. $32,000
34. A passive activity
I. includes an interest in a limited partnership held by a limited partner investor.

II. includes a working interest in an oil and gas deposit.

I. includes any trade or business in which a taxpayer does not materially participate.
II. includes rentals of apartment buildings, rental houses, etc., where no significant personal services are involved.

36. Which of the following must be classified as "portfolio income?"
I. Dividend income from an investment in Lincoln Corp. common stock.

II. Royalty income from the ownership of the mineral rights on land. The taxpayer does not share the expenses with the extraction
company.

I. Interest income on CDs from First National Bank.

II. Loss realized from the sale of one-half of his stock shares in Lockleed Corp. Lockleed is qualified small business stock.

38. A taxpayer had the following for the current year:
Active Portfolio Passive

Income Income Income
Income $75,000 $22,000 $ 55,000
Deductions (45,000) (16,000) (110,000)
Income(Loss) $30,000 $ 6,000 $(55,000)
I. If the taxpayer is a closely held corporation, taxable income from the three activities is income of $6,000.
II. If the taxpayer is an individual and the passive income is not related to a rental real estate activity, taxable income is $36,000.

39. If a taxpayer has the following for the current year:

Income $75,000 $22,000 $ 55,000
Deductions (45,000) (16,000) (110,000)
Income(Loss) $30,000 $ 6,000 $(55,000)
I. If the taxpayer is a regular corporation, taxable income from the three activities is a loss of $19,000.
II. If the taxpayer is an individual and the passive income is related to a rental real estate activity in which the taxpayer is an active
participant, taxable income is $11,000.

40. Salvador owns a passive activity that has a basis of $44,000 and a suspended loss of $18,000. Salvador's
taxable income from active and portfolio income is $55,000. If Salvador's sells the passive activity for $56,000
how will he report the transaction on his tax return?
I. Salvador will report an ordinary loss of $18,000.

II. Salvador will report a capital gain of $12,000.

41. During the year, Aimee reports $30,000 of active business income, $15,000 of income from passive activity
X, and a $25,000 loss from passive activity Y. Determine the tax consequences of these events.
I. The $15,000 income from activity X can offset $15,000 of the loss from activity Y.
II. Any passive loss that is not deducted in the current year is suspended.

42. Janine is an engineering professor at Southern College. Her annual salary is $110,000. She owns two 3-unit
apartment buildings near the university. Because of the proximity to campus, Janine actively manages the
property. During the current year, the rental of the property produced a $29,500 loss. How much of the loss may
Janine deduct for the current year?
A. $ - 0 -
B. $14,750
C. $20,000
D. $25,000
E. $29,500
43. Nancy is the owner of an apartment complex. She actively participates in the management of the building.
During the current year, it generates a taxable loss of $27,000. Nancy's other sources of income are salary of
$52,000 and interest of $21,000. What is Nancy's allowable loss from the apartment?
A. $ - 0 -
B. $18,000
C. $25,000
D. $27,000
44. Nelson is the owner of an apartment complex. He actively participates in the management of the building.
During the current year, it generates a taxable loss of $33,000. Nelson's other sources of income are salary of
$148,000 and interest of $12,000. What is Nelson's allowable loss from the apartment?
A. $ - 0 -
B. $ 1,000
C. $12,000
D. $25,000
E. $33,000.
45. Bowden is a single individual and has the following income (loss) for the current tax year:
Salary $85,000
Dividends and interest 24,000
Actively managed rental property (23,000)
What is Bowden's adjusted gross income for this year?

A. $ 85,000
B. $ 86,000
C. $ 88,500
D. $ 89,500
E. $109,000
46. Karl has the following income (loss) during the current year:
Net business income $45,500

What is Karl's adjusted gross income for this year?

A. $23,500
B. $31,400
C. $32,500
D. $45,500
E. $57,500
47. Natalie is the owner of an apartment complex. She actively participates in the management of the building.
During the current year, it generates a taxable loss of $33,000. Natalie's other sources of income are salary of
$114,000 and interest of $16,000. What is Natalie's allowable loss from the apartment in the current year?
A. $ -0-
B. $10,000
C. $15,000
D. $16,000
E. $25,000
48. Tim owns 3 passive investments. During the current year, he has the following income and loss from each
activity:
Activity 1 $(7,000)
Activity 2 (3,000)
Activity 3 4,000
What is the amount of suspended loss allocated to Activity 2?

A. $ - 0 -
B. $1,800
C. $3,000
D. $4,200
E. $6,000
49. Ricardo owns interests in 3 passive activities: A, B, and C. During the current year, activity A realizes
income of $8,000 while activities B and C realize losses of $16,000 and $24,000, respectively. Determine the
amount of suspended loss attributable to activity C.
A. $ - 0 -
B. $ 8,000
C. $12,800
D. $19,200
E. $24,000
50. Ling owns 3 passive investments. During the last two years, she has the following income and loss from
each activity:
2011 2012
Activity 1 $(14,000) $(6,000)
Activity 2 (6,000) (1,000)
Activity 3 8,000 12,000
At the end of 2012 what is the amount of suspended loss allocated to Activity 2?
A. $1,695
B. $1,815
C. $5,185
D. $5,305
E. $7,000
51. Loren owns three passive activities that had the following results for the current year:
Passive Activity A $25,000

Passive Activity B (10,000)
Passive Activity C (40,000)
If none of the passive activities are rental real estate activities, what is the amount of suspended loss attributable to Activity C?
A. $ - 0 -
B. $18,750
C. $20,000
D. $25,000
E. $40,000
52. Linda owns three passive activities that had the following results for the current year:
Passive Activity A $ (4,500)

Passive Activity B 20,000
If none of the passive activities are rental real estate activities, what is the amount of suspended loss attributable to Activity A?
A. $ - 0 -
B. $ 1,500
C. $ 4,500
D. $ 8,500
E. $10,000
53. During the current year, Diane disposes of Fine Foods Limited Partnership, at a gain of $12,000. Diane's
adjusted gross income from nonpassive sources is $120,000. She has a suspended loss from Fine Foods of
$22,000, and a loss from other passive activities of $4,500. What is the amount of Diane's adjusted gross
income for the current year?
A. $ 95,550
B. $105,500
C. $110,000
D. $115,500
E. $120,000
54. Darien owns a passive activity that has a basis of $36,000 and a suspended loss of $22,000. If Darien dies
during the year when the passive activity has a fair market value of $52,000, how will the information be
presented on his tax return?
I. Darien will report an ordinary loss of $6,000.

II. Darien will report a capital gain of $16,000.

55. "Active participation" and "real estate professional" are both exceptions to the general rule for passive
activity losses with rental real estate.
I. A taxpayer qualifying under both exceptions is limited to a maximum annual deduction of $25,000.
II. Active participation results from owning at least a 10% interest in the activity and arranging for repairs and maintenance and
collecting rents.

I. One of the tests that an individual must meet to qualify as a real estate professional is that the taxpayer spends more than 50% of
his/her time in real property trades or businesses.
II. A taxpayer with an AGI of $190,000 qualifying under the real estate professional exception may deduct an unlimited amount of
rental real estate losses.

57. Mark has an adjusted gross income of $154,000. Not included in his adjusted gross income is a $16,000 loss
from a passive activity. Which of the following statements regarding the effect of the passive loss on his
adjusted gross income is/are correct?
I. If the activity does not involve rental real estate, he can only deduct the loss as a miscellaneous itemized deduction.
II. If the activity is rental real estate and Mark is an active participant, he can deduct the $16,000 loss for adjusted gross income.

58. Rose has an adjusted gross income of $130,000. Not included in her adjusted gross income is a $15,000 loss
I. If the activity is rental real estate and Rose meets the real estate professional exception, she can deduct the $15,000 loss for adjusted
gross income.
II. If the activity is rental real estate and Rose is an active participant, she can deduct $5,000 of the loss for adjusted gross income.
59. Mary and Philip purchased an apartment building in January 2004, which they actively manage. During the
current year, the apartment building generates a loss of $35,000. Their other income is as follows:
Salaries $80,000
Loss from limited partnership acquired in 1999 (4,000)
What is Mary and Philip's adjusted gross income?

A. $59,000
B. $63,000
C. $84,000
D. $88,000
60. Judy and Larry are married and their combined salaries for the current year are $115,000. They actively
participate in the rental of two houses. For the current year they have the following losses:
Income/(Loss)
Limited Partnership A $ (5,000)
Limited Partnership B 8,000
Rental house X (5,000)
Rental house Y (2,000)
What is Judy and Larry's adjusted gross income?

A. $108,000
B. $111,000
C. $114,000
D. $115,000
E. $118,000
61. Sarah owns a passive activity that has a suspended loss of $18,000. The activity has a fair market value of
$35,000 and her adjusted basis in the activity is $20,000.
I. If Sarah sells the activity, she is allowed to deduct the $18,000 suspended loss.
II. If Sarah gifts the activity, she is only be allowed to deduct $15,000 of the suspended loss.

62. Norris owns a passive activity that has a suspended loss of $12,000. The activity has a fair market value of
$42,000 and his adjusted basis in the activity is $27,000.
I. If Norris gifts the property, he is allowed to deduct $3,000 of the suspended loss.
II. If Norris dies, none of the suspended loss is deductible.

63. Anna owns a passive activity that has a basis of $30,000 and a suspended loss of $7,000. Anna gifts the
passive activity to her daughter Patricia when the property has a fair market value of $42,000.
I. Anna will report an ordinary loss of $7,000.

II. Patricia's basis in the passive activity is $30,000.

64. Which of the following events is a "casualty" loss?
I. Lightning damage.
II. Loss of the topsoil on a farm from a flood.

I. Diamonds stolen by thief, reported to police

II. Florida orange trees killed by a freeze.

66. Mario's delivery van is completely destroyed when a tree fell on it. Mario's insurance company pays him
$11,000 for the accident. The van cost $20,000 three years ago. Tax depreciation deductions of $6,000 have
been taken to date. The "Blue Book value" (i.e., fair market value) of the van is $12,000 on the accident date.
What is Mario's casualty loss on the van?
A. $ - 0 -
B. $ 1,000
C. $ 3,000
D. $ 8,000
E. $13,000
67. In April of the current year, Speedy Printing Company's delivery van is stolen. The van was originally
purchased in 2007 for $13,000, and its fair market value at the time of the theft is $4,000. The van has a zero
adjusted basis on the books of Speedy. The previous year, Speedy dropped theft insurance on the van, so it
receives no compensation for the loss from its insurance company. What amount of loss can Speedy deduct?
A. $ - 0 -
B. $ 4,000
C. $10,900
D. $12,900
E. $13,000
68. Jennifer's business storage shed is damaged by a hale storm. The shed is uninsured. Its adjusted basis is
$8,000. Just before the accident the shed is appraised for $10,000. In its damaged condition, the shed can be
sold for $4,000. What is Jennifer's loss from the storm?
A. $ - 0 -
B. $ 4,000
C. $ 6,000
D. $ 8,000
E. $10,000
69. Gomez, a self-employed consultant, is involved in a traffic accident with his business-use automobile. The
car is totally destroyed and Gomez's insurance policy reimburses him $8,000 for the fair market value of the car
immediately before the accident. His basis in the car is $11,000. What is the amount of Gomez's casualty loss
deduction?
A. $ - 0 -
B. $ 2,000
C. $ 3,000
D. $ 8,000
E. $11,000
70. Ford's automobile that he uses 100% for business is vandalized. The adjusted basis before the vandalism is
$3,000. The fair market value of the car before the vandalism is $7,000, and the fair market value of the
property after the vandalism is $2,000. Ford's insurance does not cover vandalism. What is Ford's loss deduction
for the year?
A. $ - 0 -
B. $1,000
C. $2,000
D. $3,000
E. $5,000
71. Which of the following losses are generally deductible?
I. Loss on the sale of corporate stock.

II. Losses incurred in carrying on a trade or business.

I. Loss on the sale of a personal residence.

II. Loss due to the theft of business inventory.

73. All of the following are capital assets, except

A. Personal residence.
B. Land used for business parking lot.
C. Pickup truck used for personal transportation..
D. Corporate bonds held for investment purposes.
E. A hand-written letter by Dwight Eisenhower held in a private collection.
74. In addition to his salary, Peter realizes a $1,000 short-term capital gain and a $5,000 long-term capital loss.
The net effect of the capital asset transactions on Peter's adjusted gross income is
A. $ -0-
B. $ 1,000
C. $ (3,000)
D. $ (4,000)
E. $ (5,000)
75. During the current year, Terry has a short-term capital loss of $9,000 and a long-term capital gain of $3,000.
Due to these transactions Terry reports
A. A capital loss deduction of $3,000 and a loss carryforward of $3,000
B. A capital loss deduction of $3,000 and a loss carryforward of $6,000.
C. A capital loss deduction of $9,000.
D. A capital gain of $3,000 and a loss carryforward of $9,000.
E. A capital loss deduction of $6,000
76. Which of the following is true concerning capital losses and net operating losses for corporations:
Capital loss Net operating loss

A. Carried back 5 years Carried back 2 years
B. Carried back 5 years Carried forward 20 years
C. Carried back 3 years Carried forward 20 years
D. Carried back 5 years Carried forward 5 years
E. Carried back 3 years Carried forward 5 years
77. Billingsworth Corporation has the following net capital gains and losses for 2008 through 2011.
Billingsworth' marginal tax rate is 34% for all years.
2008 2009 2010 2011

$8,000 $3,000 $6,500 $(9,000)
In 2012, Billingsworth Corporation earned net operating income of $30,000. What is/are the tax effect(s) of the $9,000 net capital loss in 2011?
I. Corporate taxable income is $21,000.
II. The net capital loss will provide income tax refunds totaling $3,060.

78. During the current year, Schmidt Corporation has operating income of $75,000 and a net capital loss of
$25,000. What is Schmidt's taxable income?
A. $ - 0 -
B. $50,000
C. $72,000
D. $75,000
E. $90,000
79. Melinda and Riley are married taxpayers. During the year, they completed a single capital asset sale in
which a loss of $120,000 is realized on the sale ($15,000 amount realized, less $135,000 adjusted basis) of
qualified small business stock. How much of the loss can the taxpayers deduct?
A. $ 3,000
B. $ 53,000
C. $100,000
D. $103,000
E. $120,000
80. Rosanna, a single taxpayer, owns 2,000 shares of qualifying small business stock that she purchased for
$225,000. During the current year, she sells 800 of the shares for $30,000. If this is the only stock Rosanna sells
during the year, what can she deduct as an ordinary and capital loss?
Ordinary loss Capital loss

A. $58,000 $ -0-
B. $50,000 $ 3,000
C. $50,000 $10,000
D. $ -0- $ 3,000
E. $ -0- $60,000
81. Roscoe and Amy are married and own 12,000 shares of qualifying small business stock that they purchased
for $150,000. During the current year, they sell 10,000 shares of the small business stock to an unrelated third
party for $30,000. Eager to sell the remaining shares, they sell the other 2,000 shares to Amy's sister for $4,000.
In addition, they sell stock with a basis of $5,000 for $10,000. The stock was acquired in 2007. In 2010, Roscoe
and Amy loaned her brother, Carl, $8,000 to start his business. Carl has only repaid $2,000 on his documented
loan. During the year, Carl has filed for bankruptcy. The bankruptcy court liquidates all of Carl's assets and
Roscoe and Amy receive nothing from the liquidation.
I. Roscoe and Amy can deduct $120,000 as an ordinary loss on the small business stock.
II. Roscoe and Amy have a net short-term capital loss of $1,000.

82. Aunt Bea sold some stock she purchased several years ago for $10,000 to her nephew, Andy, for $6,000.
I. If this is Aunt Bea's only stock transaction, she can deduct only $3,000 of the loss.
II. If Andy sells the stock for $10,000, his taxable gain is $4,000.

83. Frasier sells some stock he purchased several years ago for $10,000 to his brother, Niles, for $6,000.
I. If this is Frasier's only stock transaction, he can deduct only $3,000 of the loss.
II. If Niles sells the stock for $10,000, his taxable gain is $4,000.

84. Georgia sells stock she purchased for $20,000 to her brother Billy for $12,000. Two years later, Billy sells
the stock to Allie, an unrelated individual, for $22,000. What is Billy's recognized gain or loss?
A. $ - 0 -
B. $ 2,000 gain
C. $10,000 gain
D. $ 8,000 loss
E. $ 6,000 loss
85. Lisa sells some stock she purchased several years ago for $10,000 to her brother Bart for $8,000. One year
later Bart sells the stock for $12,000. The tax consequences to Lisa and Bart are:
Lisa Bart
A. $2,000 loss $4,000 gain
B. No gain or loss $4,000 gain
C. No gain or loss $2,000 gain
D. $2,000 gain No gain or loss
E. $2,000 loss $2,000 gain
86. Olivia sells some stock she purchased several years ago for $9,000 to her brother Jack for $12,000. One year
later Jack sells the stock for $15,000. The tax consequences to Olivia and Jack are:
Olivia Jack
A. $3,000 gain $3,000 gain
D. $3,000 gain $6,000 gain
E. No gain or loss No gain or loss
87. Sylvia owns 1,000 shares of Sidney Sails, Inc., for which she paid $18,000 several years ago. On March 15,
she purchases 400 additional shares for $5,000. Sylvia sells the original 1,000 shares for $13,500 on April 1.
These are her only stock transactions during the year. Sylvia's capital loss deduction for the current year and her
basis in the new shares are:
Capital loss Basis

A. $3,000 $5,000
B. $2,700 $6,800
C. $4,500 $5,000
D. $3,000 $6,800
E. $2,700 $5,000
88. Hamlet, a calendar year taxpayer, owns 1,000 shares of Vanity Corporation common stock, which he
purchased two years ago for $4,000. Hamlet sells all of his shares on December 29, 2012, for $2,500. On
January 23, 2013, he purchases 600 shares of Vanity Corporation common stock. What is the amount of
Hamlet's recognized loss in 2012?
A. $ - 0 -
B. $ 600
C. $ 900
D. $1,500
E. $4,000
89. The wash sale provisions apply to which of the following?
I. Tom realizes an $8,000 loss on the June 17, 2012, sale of 650 shares of Roadrunner Corporation common stock. He replaces the 650
shares with Hawke Inc., stock on July 8, 2012.
II. Rosie realizes a $6,000 loss on the December 29, 2012, sale of 40 Billings corporate bonds. Each bond has a face value of $1,000.
She replaces the Billings corporate bonds with 30 Redeemer corporate bonds, each with a face value of $1,000 on January 16, 2013.
The Redeemer bonds have the same interest rate, maturity date, but a different bond rating (AAA) as the Billings bonds.

I. Jim bought 500 additional shares of Alfa Gamma stock for $4,000 on December 2, 2012. Jim owned 2,500 shares after that purchase.
On December 26, 2012, Jim realizes a loss of $1,500 on the sale of 250 shares of Alfa Gamma stock.
II. Calvin realizes a $8,000 loss on the December 29, 2012, sale of Sloan corporate bonds. Each bond has a face value of $1,000. He
replaces the Sloan corporate bonds with the same number of Jackson corporate bonds, each with a face value of $1,000 on January
16, 2013. The Jackson bonds have a different interest rate and maturity date then the Sloan bonds but have the same bond rating
(AAA).

91. During the year, Daniel sells both of his personal vehicles. On January 10, he realizes a $9,000 loss on the
sale of the first car. On April 5, he realizes a $1,000 gain on the sale of the second car. Assume Daniel's salary
for the year is $50,000, and he has no other income. What is Daniel's Adjusted Gross Income?
A. $40,000
B. $41,000
C. $42,000
D. $50,000
E. $51,000
92. Samantha sells the following assets and realizes the following gains (losses) during the current year:
Home computer (personal) $ (600)

Municipal bonds 6,000
Stamp collection 3,000
Carpeting from residence (2,000)
1956 Chevrolet auto 4,000
As a result of these sales, Samantha's adjusted gross income will:

A. Increase by $ 5,000.
B. Increase by $10,400.
C. Increase by $11,000.
D. Increase by $13,000.
E. Decrease by $ 600.
93. Willie sells the following assets and realizes the following gains (losses) during the current year:
Personal auto $(5,000)

Municipal bonds (7,000)
Furniture (6,000)
1% interest in oil well (8,000)
As a result of these sales, Willie's adjusted gross income will:
A. Decrease by $ 3,000.
B. Decrease by $ 4,000.
C. Decrease by $11,000.
D. Decrease by $15,000.
E. Not change.
94. During the current year, Cathy realizes
• a $3,000 loss on the sale of her personal use automobile held 4 years.
• a $4,000 loss on the sale of Itoham Corporation stock held 3 years for investment.
• a $2,000 gain on the sale of Sterling, Inc., bonds held 7 months for an investment.
Determine the tax consequences of these events.

A. Cathy deducts a $5,000 net capital loss.
B. Cathy deducts a $3,000 net capital loss.
C. Cathy deducts a $2,000 net capital loss.
D. Cathy deducts a $1,000 net capital loss.
E. Cathy deducts a $7,000 net capital loss.
95. During the year, Shipra's apartment is burglarized and her TV and stereo are taken. Her basis in the TV is
$1,200 and it has a fair market value of $700. Her basis in the stereo is $400 and it has a fair market value of
$600. What is Shipra's theft loss deduction (before considering the annual limitation based upon AGI)?
A. $ - 0 -
B. $ 900
C. $1,000
D. $1,200
E. $1,300
96. The Ottomans own a winter cabin in Durango, Colorado. They purchased the cabin in 1984 for $65,000.
During the current year, a blizzard partially destroys the cabin. The fair market value of the cabin after the
blizzard is $70,000. The insurance company estimates that the cost of repairing the cabin will be $40,000. The
insurance company will reimburse the Ottomans for 70% of the repair cost. What can they deduct as a casualty
loss if their adjusted gross income for the year is $80,000?
A. $ 3,900
B. $ 4,000
C. $ 8,000
D. $11,900
E. $12,000
97. Jerome owns a farm, which has three separate houses. He rents out two of the houses and lives in the other
house. During the current year, a tornado goes through his property causing damage to the houses. Rental House
A had a fair market value of $40,000 and an adjusted basis of $20,000, but it is not damaged by the tornado. A
local real estate agent told Jerome that because of the tornado, property values in the area have declined 10%.
Rental House B, which has an adjusted basis of $25,000, is worth $60,000 before the tornado and $20,000 after
the tornado. Jerome's insurance company pays him $20,000 for the damage to Rental House B. Jerome's
residence (which has an adjusted basis of $80,000) was worth $70,000 before it is totally destroyed by the
tornado. Jerome's insurance company reimburses him $60,000 for the loss of his residence. Ignore the
limitation based on Adjusted Gross Income.
I. Jerome deducts a loss of $5,000 on Rental House A.

II. Jerome deducts a loss of $35,000 on Rental House B.
III. Jerome's loss on his residence is $9,900.
IV. Jerome cannot deduct a loss on Rental House A.

C. Only statement III is correct.
D. Statements II and IV are correct.
E. Statements III and IV are correct.
98. If a corporation incurs a net operating loss, what would cause it to elect to carry the loss forward and forsake
the carryback? Explain.
99. Tyrone is the president of JWH Manufacturing and owns 30% of its stock. JWH is organized as an S
corporation. During 2012, JWH has a loss of $240,000. At the beginning of 2012, Tyrone's amount at-risk in
JWH is $60,000.
a. What is Tyrone' deductible loss in 2012? What is Tyrone's at-risk amount at the end of 2012?
b. In 2013, JWH has a taxable income of $100,000. What is the effect on Tyrone's 2013 income? What is Tyrone's at-risk amount at the end
of 2013?
100. Why did Congress enact the at-risk rules?
101. Ronald is exploring whether to open a franchise of Quick Tax. He plans on forming an S corporation and
investing $15,000 of his own money while borrowing $45,000 from the bank to finance the purchase of the
necessary computing equipment and software. The bank has proposed two financing options. Under the first
option, the interest rate is only 10%, but the loan is recourse. The second option increases the interest rate to
15%, but the loan is nonrecourse.
a. Discuss the tax and non-tax aspects of the two options.
b. If Ronald incurs a $20,000 loss in the first year of operations, how much, if any, of the loss can he deduct if the loan is recourse?
Nonrecourse?
102. Discuss the difference(s) between the real estate professional exception and the active participation
exception when dealing with rental properties.
103. Classify and briefly explain the proper classification for each of the income-generating activities below.
The classifications are either, "active," "passive," or "portfolio."
a. Ford Motor Company Bond interest.
b. Commissions earned from insurance sales.
c. Sale of Microsoft common stock held as an investment.
d. Income from a limited partnership investment.
e. Rental income from an apartment building and the individual owner does not qualify as a real estate professional.
f. Gain from the sale of rental real estate and the individual owner does not qualify as a real estate professional.
104. A taxpayer has the following income (losses) for the current year:
Active Income Portfolio Income Passive Income

$98,000 $22,000 $(30,000)
What is the taxable income (loss) of the taxpayer if:

a. The taxpayer is a publicly held corporation?
b. The taxpayer is a closely held corporation?
c. The taxpayer is an individual and the passive income is not from a rental activity?
d. The taxpayer is an individual and the passive income is the result of a rental activity for which the taxpayer qualifies as a real estate
professional.
e. The taxpayer is an individual and the passive income is the result of a rental activity for which the taxpayer fails to qualify as a real
estate professional but meets the active participation test?
105. Maryanne is the senior chef for Bistro 501 Restaurant. Discuss whether the following losses are affected
by the passive activity rules.
a. Maryanne has a $4,500 loss from her ownership interest in a catfish-farm limited partnership. Maryanne is a limited partner.
b. Maryanne has a $7,000 loss from her ownership interest in a feeder-lamb limited partnership. Maryanne is a general partner and is
responsible for day-to-day management decisions.
c. Maryanne has a $11,000 loss from her ownership of a low-income housing project.
d. Maryanne owns a rental house across the street from North Forest College and actively participates in managing the rental property. The
rental property generates a loss of $5,000 for the current year.
106. Erline begins investing in various activities during the current year. Unfortunately, her tax advisor fails to
warn her about the passive loss rules. The results of the three passive activities she purchased for the current
year are:
Income
(Loss)
Pas$(36,00
siv 0)
e
Ac
tivi
ty
1
Pas
siv 22,000
e
Ac
tivi
ty
2
Pas
siv (4,000)
e
Ac
tivi
ty
3
a. If Erline's adjusted gross income is

$170,000 before considering the effect of
the passive activities, what will Erline's
adjusted gross income be for the current
year? Fully explain the effect of the
passive activity investments on her
adjusted gross income.
b. Because Passive Activity 1 has been
such a loser, Erline is considering selling
it. However, she is concerned about the
effect of the sale on her taxable income
because her tax advisor told her that her
basis in the activity is only $14,000 and
she could sell it for $32,000. Explain the
effect on her taxable income if she sells
Activity 1 for $32,000.
107. Brent is single and owns a passive activity that has a basis of $25,000 and a suspended passive loss of
$8,000. He acquired the passive activity in 2010. Brent's taxable income from active and portfolio income is
$85,000, and he has no other capital gains or losses for the year.
a. What is the effect on Brent's taxable income if he sells the passive activity for $42,000?
b. What is the effect on Brent's taxable income if he sells the passive activity for $13,000?
c. What is the effect on Brent's taxable income if he dies this year while the fair market value of the passive activity is $30,000?
d. What is the effect on Brent's taxable income if he dies this year while the fair market value of the passive activity is $18,000?
e. What is the effect on Brent's taxable income if he gives the passive activity to his brother Norm when the fair market value of the passive
activity is $30,000?
108. For each of the following situations, determine whether the item is deductible, and discuss any limitations,
which might be placed on the deduction.
a. Carl owns an office building that he rents out to various businesses. During the current year, rental income from the building is $95,000.
Carl's allowable expenses relating to the office building are $150,000.
b. Edward sells stock to an unrelated party at a $70,000 loss during the current year.
c. Lee sold furniture at a loss of $5,000 during the current year.

109. For each of the following situations, determine whether the item is deductible, and discuss any limitations
that might be placed on the deduction.
Rioters damage Margarita's business building, which has an adjusted basis of $50,000, during the current year.
a. Assume the building is totally destroyed. The cost of replacing the building is estimated to be $55,000. Margarita's insurance reimburses
her $32,000.
b. Assume the building is severely damaged. Before the riot, the building is worth $55,000. The insurance adjuster estimates the value of the
building after the damage at $20,000. Margarita's insurance reimbursed her $32,000.
110. During the year Wilbur has the following capital gains and losses:
Short-term capital gains $ 4,500

Short-term capital losses (6,000)
Long-term capital gains 4,200
Long-term capital losses (7,500)
What is the effect of the capital gains and losses on Wilbur's taxable income?
111. The Corinth Corporation is incorporated in 20099 and had no capital asset transactions during the year.
From 2009 through 2012, the company had the following capital gains and losses:
2009 2010 2011 2012

Capital Gains $18,000 $ 12,000 $ 20,000 $ 21,000
Capital Losses (7,000) (16,000) (26,000) (31,000)
If Corinth's marginal tax rate during each of these years is 34%, what is the effect of Corinth's capital gains and losses on the amount of tax due each
year?
112. Fowler sells stock he had purchased for $22,000 to his brother, Phil, for $15,000. What is the tax
consequence of the sale to Fowler and Phil? Explain the three possible tax consequences if Phil sells the stock
two years later to his neighbor?
113. Gloria owns 750 shares of the Greene Company that she acquired in 2008 for $9,000. On June 12 of the
current year, she sells 500 shares of Greene for $4,000. Two weeks later on June 26, Gloria purchases 200
shares of Greene for $2,200. What are the effects of the June 12 sale? Explain.
114. Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain?
115. Hubert and Jared are both involved in automobile accidents, which totally destroy their automobiles this
year. Hubert and Jared purchased the automobiles at the same time for the same cost, and neither of them
receives any insurance reimbursement for the destruction of their automobiles. Before considering the effect of
their casualties, Hubert and Jared have identical adjusted gross incomes. Although Hubert and Jared are
seemingly alike in every aspect regarding the automobiles, Hubert is allowed a deduction of $2,000 for the
destruction of his automobile and Jared is not allowed any deduction for his automobile. What causes this
disparity of treatments between Hubert and Jared? Explain. Use examples if necessary.
Chapter 7--Losses: Deductions and Limitations Key
1. Passive Any asset that is not a receivable, inventory, or

activity depreciable or real property used in a trade or business. 5
2. Net operating
loss Limited to $3,000 annually for individuals. 4
3. Transaction A loss that results from some sudden, unexpected, or
loss unusual event. 6
4. Capital loss An excess of business deductions over business income. 2
A trade or business in which the taxpayer is not a material
5. Capital asset participant. 1
6. Casualty loss When an asset is disposed of for less than its basis. 3
1. NOL Owns at least a 10% interest and is significantly

carryforward involved in the rental activity. 12
Cash or other assets contributed plus recourse debts of
2. At-risk amount the activity. 2
3. Small business The amount of the loss for fully destroyed property is
stock the property's adjusted basis. 7
Management is left to at least one general partner
whose liability is not limited and who is responsible for
4. Recourse debt the on-going activities of the business. 8
5. Material Involved in a rental activity for more than 500 hours in
participant a year. 5
The loss may be used to offset income from prior
6. NOL carryback periods. 6
7. Business
casualty loss The loss is used to offset income in future periods. 1
8. Limited A liability that is only secured by the underlying
partnership property. 9
The amount of loss is limited to the lower of the
9. Nonrecourse property's adjusted basis, or the reduction in fair market
debt value. 10
10. Personal
casualty loss A loss that is generally not deductible. 11
11. Personal-use
loss The borrower is personally liable for the debt. 4
12. Active A type of stock that receives some ordinary loss
participant treatment. 3
3. An operating loss occurs when an entity's deductions exceeds the income generated for the period.
TRUE
4. A transaction loss occurs when an asset is disposed of at less than its basis.
TRUE
5. A corporation has a net capital loss. The significance of a net capital loss in 2012 for a corporation is that it
can be carried back 3 years and carried forward 5 years by a corporation to offset capital gains in other taxable
years.
TRUE
6. The term tax shelter refers to investment property that involves residential and commercial real estate.
FALSE
7. Lu-Yin purchased her consulting business with $75,000 of her own funds and she borrowed $125,000 from
the local bank. If she is personally responsible for the loan, she is at risk only for $50,000.
FALSE
8. Material participation requires that an individual participates in an activity for more than 200 hours per year
or spends more than 50 hours a year in the activity and the time spent is more than anyone else spends on the
activity.
FALSE
9. Virginia owns a business that rents power equipment to construction companies. Despite maintaining,
delivering, and picking up the equipment, Virginia's business is passive since it is a rental activity.
FALSE
10. While most rental activities are classified as passive, an exception is low-income housing.
TRUE
11. Portfolio income consists of unearned income from dividends, interest, royalties, annuities, and other assets
held as investments.
TRUE
12. A closely held corporation cannot offset net passive losses against income of the business.
FALSE
13. Dwight owns an apartment complex that has a $30,000 loss. His adjusted gross income is $85,000 before
the loss. Since he qualifies as an active participant he may deduct $25,000.
TRUE
14. Leon is allowed to deduct all the current and suspended losses on his passive activity if he sells his entire
interest in the passive activity during the year.
TRUE
15. John discovers that termites have destroyed the front porch of his office building. The damage occurred over
a 3-year period. He is eligible for a casualty loss deduction.
FALSE
16. The Baskerville Corporation has a net $6,500 capital loss during the current taxable year. They will be able
to deduct $3,000 this year and carries the remaining $3,500 forward.
FALSE
17. Any corporate capital loss not used in the current year can be carried back 2 years and carried forward 20
years to offset capital gains in those years.
TRUE
18. Constance owns a boutique. During the current year, she has gross income of $400,000 and allowable
deductions related to the business of $425,000.
I. Constance has incurred a transaction loss, which represents her unrecovered cost of capital.
II. Constance has suffered an annual loss, which may be carried back 2 years or forward 20 years if not used in the current year.

19. Barry owns all of the stock of Jerrico Corporation; an internet based gaming firm. Barry is also the President
of and works full-time for Jerrico. During the current year, Jerrico has a loss of $125,000 from its operations.
I. If Jerrico is an S Corporation, Barry may deduct the loss on his personal tax return as a deduction for AGI.
II. If Jerrico is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20
years.

20. Perry owns all of the stock of Sound Corporation. Perry is also the President of Sound and works full-time
running Sound. During the current year, Sound has a loss of $75,000 from its operations.
I. If Sound is an S Corporation, Perry deducts the loss on his personal tax return as a deduction from AGI.
II. If Sound is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20
years.

21. Kenneth owns all of the stock of Kearney Corporation. Kenneth is also the President of Kearney and works
full-time running the corporation. During the current year, Kearney has a loss of $40,000 from its operations.
I. If Kearney is an S Corporation, the corporation may carryback the loss 2 years (and obtain a refund of taxes paid) with any
remaining loss carried forward 20 years.
II. If Kearney is a regular corporation, Kenneth may deduct the loss for AGI on his personal tax return because the corporation is a flow
through entity.

22. Baker Corporation suffers a net operating loss (NOL) of $65,000 in 2012. Baker was incorporated in 2010.
Baker had a NOL of $20,000 in 2010 and taxable income of $35,000 in 2011. The corporation expects a taxable
income of $200,000 in 2013. What valid alternatives are available to Baker concerning the $50,000 loss?
I. Baker can carryback the loss to 2011 and will receive a refund of $2,250.
II. Baker can elect to carryforward the loss and expect to receive tax savings of $19,500.
23. Carmen purchased a business for $150,000 by investing $40,000 of her own funds and borrowing $110,000
from Local National Bank. Carmen signed the note payable as a personal guarantor. In the first year of
operations the business had an operating loss of $120,000. During the second year, the business has an
operating loss of $45,000. How much of the year two loss is deductible against Carmen's income from other
business activities? Assume that Carmen materially participates in the business.
A. $ - 0 -
B. $ 15,000
C. $ 30,000
D. $ 45,000
E. $120,000
24. Sullivan, a pilot for Northern Airlines, has adjusted gross income of $92,000 before considering the
following losses. The passive activity rules disallow the deduction for a loss in which of the following?
I. Sullivan has a $4,500 loss from his ownership interest in Cowco, a feeder-cattle limited partnership. Sullivan is a general partner and
is responsible for day-to-day management decisions.
II. Sullivan has a $7,000 loss from his ownership interest in Swineco, a feeder-pig limited partnership. Sullivan is a limited partner.

25. Maria, an engineer, has adjusted gross income of $167,000 before considering the following losses. The
passive activity rules disallow the deduction for the loss in which of the following?
I. Maria has a $21,000 loss from her ownership of Family Apartment Village, a low-income housing project.
II. Maria owns and actively participates in managing a rental house across the street from East State College. This activity generates a
$7,000 loss in the current year.

26. If an individual is not a material participant, a rental activity is considered passive. However, certain rental
activities are not deemed to be rentals for passive loss purposes even if the individual is not a material
participant. Which of the following is not excluded from the passive loss rules?
A. Golf cart rentals.
B. Hotel rooms.
C. Jet ski rentals.
D. Apartment rentals.
E. Construction equipment rentals.
27. Pedro owns a 50% interest in a limited partnership that operates an apartment complex. During the current
year, the partnership generates a taxable rental loss of $42,000. Pedro's other sources of income are salary of
$55,000 and interest of $18,000. What is Pedro's allowable loss from the apartment?
A. $ - 0 -
B. $18,000
C. $21,000
D. $25,000
28. Jose, Mahlon, and Eric are partners in New Communications Partnership. Jose owns a 50% interest, Mahlon
owns a 35% interest, and Eric owns a 15% interest. During the current year (the first year of operation for the
enterprise), the business has a loss. Although the partnership is established as a general partnership, Jose
functions as the manager and performs all of the day-to-day duties of a chief operating officer. Mahlon and Eric
are merely investors who receive monthly reports about the business. At the close of the current tax year, each
partner will receive a share of the partnership loss. Which of the partners will be able to deduct his (their) share
of the partnership loss?
I. Jose
II. Mahlon
III. Eric
A. Mahlon
B. Jose, Mahlon, and Eric
C. Jose
D. Jose and Mahlon
E. Mahlon and Eric
29. During 2012, Pamela worked two "jobs." She performed financial consulting activities for 1,000 hours and
real estate development and rental activities for 1,200 hours. Her real estate development and rental activities
produced a loss of $35,000. Her financial consulting generated a net business income of $40,000. How much of
the loss can Pamela deduct against her financial consulting income?
A. $ - 0 -
B. $17,500
C. $25,000
D. $35,000
E. $40,000
30. During the current year, Alyssa incurred a net loss of $27,500 from a 5 percent interest in a partnership that
operated and managed an office building. Alyssa had adjusted gross income from other sources of $110,000 and
spent 67 hours assisting in the management of the building. Determine Alyssa's total adjusted gross income for
the current year.
A. $ 82,500
B. $ 90,000
C. $100,000
D. $105,000
E. $110,000
31. Kenzie and Ross equally own rental real estate. The rental property generated a loss of $20,000. Kenzie is
also employed as a part-time Tupperware salesperson and full time as a real estate agent. For her share of the
loss to be fully deductible, she must:
I. Not have an adjusted gross income in excess of $100,000.

II. Spend more than 750 hours, in total, as a realtor
III. Spend more than 100 hours managing the rental activity, and spend more time then Ross.
IV. She must spend more than 50% of her time as a realtor and must own more than 5% of the real estate agency.

C. Statements I and II are correct.
D. Statements II, III, and IV are correct.
E. Statements I, II, III, and IV are correct.
32. Travis is a 30% owner of 3 rental houses. He spends 625 hours a year managing the properties. In addition,
he owns a 20% interest in a real estate business to which he devotes 1,800 hours a year. The rental units
generate a total loss of $22,000, and Travis' adjusted gross income in the current year, before considering the
rental properties, is $120,000. How much of the loss can Travis deduct?
A. $ - 0 -
B. $ 4,500
C. $ 6,600
D. $15,000
E. $22,000
33. Susan is the owner of a 35-unit apartment complex. She spends 950 hours a year managing the property. In
addition, she works part-time for a mortgage company. She spends 1,150 hours a year as a bookkeeper at the
mortgage company. The apartment complex generated a loss of $32,000, and Susan's adjusted gross income for
the current year, before considering the apartment complex, is $48,000. How much of the loss can Susan
deduct?
A. $ - 0 -
B. $14,476
C. $16,727
D. $25,000
E. $32,000
I. includes an interest in a limited partnership held by a limited partner investor.

II. includes a working interest in an oil and gas deposit.

I. includes any trade or business in which a taxpayer does not materially participate.
II. includes rentals of apartment buildings, rental houses, etc., where no significant personal services are involved.

I. Dividend income from an investment in Lincoln Corp. common stock.

II. Royalty income from the ownership of the mineral rights on land. The taxpayer does not share the expenses with the extraction
company.

I. Interest income on CDs from First National Bank.

II. Loss realized from the sale of one-half of his stock shares in Lockleed Corp. Lockleed is qualified small business stock.

38. A taxpayer had the following for the current year:

Income $75,000 $22,000 $ 55,000
Deductions (45,000) (16,000) (110,000)
Income(Loss) $30,000 $ 6,000 $(55,000)
I. If the taxpayer is a closely held corporation, taxable income from the three activities is income of $6,000.
II. If the taxpayer is an individual and the passive income is not related to a rental real estate activity, taxable income is $36,000.

39. If a taxpayer has the following for the current year:

Income $75,000 $22,000 $ 55,000
Deductions (45,000) (16,000) (110,000)
Income(Loss) $30,000 $ 6,000 $(55,000)
I. If the taxpayer is a regular corporation, taxable income from the three activities is a loss of $19,000.
II. If the taxpayer is an individual and the passive income is related to a rental real estate activity in which the taxpayer is an active
participant, taxable income is $11,000.

40. Salvador owns a passive activity that has a basis of $44,000 and a suspended loss of $18,000. Salvador's
taxable income from active and portfolio income is $55,000. If Salvador's sells the passive activity for $56,000
how will he report the transaction on his tax return?
I. Salvador will report an ordinary loss of $18,000.

II. Salvador will report a capital gain of $12,000.

41. During the year, Aimee reports $30,000 of active business income, $15,000 of income from passive activity
X, and a $25,000 loss from passive activity Y. Determine the tax consequences of these events.
I. The $15,000 income from activity X can offset $15,000 of the loss from activity Y.
II. Any passive loss that is not deducted in the current year is suspended.

42. Janine is an engineering professor at Southern College. Her annual salary is $110,000. She owns two 3-unit
apartment buildings near the university. Because of the proximity to campus, Janine actively manages the
property. During the current year, the rental of the property produced a $29,500 loss. How much of the loss may
Janine deduct for the current year?
A. $ - 0 -
B. $14,750
C. $20,000
D. $25,000
E. $29,500
43. Nancy is the owner of an apartment complex. She actively participates in the management of the building.
During the current year, it generates a taxable loss of $27,000. Nancy's other sources of income are salary of
$52,000 and interest of $21,000. What is Nancy's allowable loss from the apartment?
A. $ - 0 -
B. $18,000
C. $25,000
D. $27,000
44. Nelson is the owner of an apartment complex. He actively participates in the management of the building.
During the current year, it generates a taxable loss of $33,000. Nelson's other sources of income are salary of
$148,000 and interest of $12,000. What is Nelson's allowable loss from the apartment?
A. $ - 0 -
B. $ 1,000
C. $12,000
D. $25,000
E. $33,000.
45. Bowden is a single individual and has the following income (loss) for the current tax year:
Salary $85,000
What is Bowden's adjusted gross income for this year?

A. $ 85,000
B. $ 86,000
C. $ 88,500
D. $ 89,500
E. $109,000
46. Karl has the following income (loss) during the current year:
Net business income $45,500

What is Karl's adjusted gross income for this year?

A. $23,500
B. $31,400
C. $32,500
D. $45,500
E. $57,500
47. Natalie is the owner of an apartment complex. She actively participates in the management of the building.
During the current year, it generates a taxable loss of $33,000. Natalie's other sources of income are salary of
$114,000 and interest of $16,000. What is Natalie's allowable loss from the apartment in the current year?
A. $ -0-
B. $10,000
C. $15,000
D. $16,000
E. $25,000
48. Tim owns 3 passive investments. During the current year, he has the following income and loss from each
activity:
Activity 1 $(7,000)
Activity 2 (3,000)
Activity 3 4,000
What is the amount of suspended loss allocated to Activity 2?

A. $ - 0 -
B. $1,800
C. $3,000
D. $4,200
E. $6,000
49. Ricardo owns interests in 3 passive activities: A, B, and C. During the current year, activity A realizes
income of $8,000 while activities B and C realize losses of $16,000 and $24,000, respectively. Determine the
amount of suspended loss attributable to activity C.
A. $ - 0 -
B. $ 8,000
C. $12,800
D. $19,200
E. $24,000
50. Ling owns 3 passive investments. During the last two years, she has the following income and loss from
each activity:
2011 2012
Activity 1 $(14,000) $(6,000)
Activity 2 (6,000) (1,000)
Activity 3 8,000 12,000
At the end of 2012 what is the amount of suspended loss allocated to Activity 2?
A. $1,695
B. $1,815
C. $5,185
D. $5,305
E. $7,000
51. Loren owns three passive activities that had the following results for the current year:
Passive Activity A $25,000

Passive Activity B (10,000)
If none of the passive activities are rental real estate activities, what is the amount of suspended loss attributable to Activity C?
A. $ - 0 -
B. $18,750
C. $20,000
D. $25,000
E. $40,000
52. Linda owns three passive activities that had the following results for the current year:
Passive Activity A $ (4,500)

Passive Activity B 20,000
If none of the passive activities are rental real estate activities, what is the amount of suspended loss attributable to Activity A?
A. $ - 0 -
B. $ 1,500
C. $ 4,500
D. $ 8,500
E. $10,000
53. During the current year, Diane disposes of Fine Foods Limited Partnership, at a gain of $12,000. Diane's
adjusted gross income from nonpassive sources is $120,000. She has a suspended loss from Fine Foods of
$22,000, and a loss from other passive activities of $4,500. What is the amount of Diane's adjusted gross
income for the current year?
A. $ 95,550
B. $105,500
C. $110,000
D. $115,500
E. $120,000
54. Darien owns a passive activity that has a basis of $36,000 and a suspended loss of $22,000. If Darien dies
during the year when the passive activity has a fair market value of $52,000, how will the information be
presented on his tax return?
I. Darien will report an ordinary loss of $6,000.

II. Darien will report a capital gain of $16,000.

I. A taxpayer qualifying under both exceptions is limited to a maximum annual deduction of $25,000.
II. Active participation results from owning at least a 10% interest in the activity and arranging for repairs and maintenance and
collecting rents.

I. One of the tests that an individual must meet to qualify as a real estate professional is that the taxpayer spends more than 50% of
his/her time in real property trades or businesses.
II. A taxpayer with an AGI of $190,000 qualifying under the real estate professional exception may deduct an unlimited amount of
rental real estate losses.

57. Mark has an adjusted gross income of $154,000. Not included in his adjusted gross income is a $16,000 loss
I. If the activity does not involve rental real estate, he can only deduct the loss as a miscellaneous itemized deduction.
II. If the activity is rental real estate and Mark is an active participant, he can deduct the $16,000 loss for adjusted gross income.

58. Rose has an adjusted gross income of $130,000. Not included in her adjusted gross income is a $15,000 loss
I. If the activity is rental real estate and Rose meets the real estate professional exception, she can deduct the $15,000 loss for adjusted
gross income.
II. If the activity is rental real estate and Rose is an active participant, she can deduct $5,000 of the loss for adjusted gross income.
59. Mary and Philip purchased an apartment building in January 2004, which they actively manage. During the
current year, the apartment building generates a loss of $35,000. Their other income is as follows:
Salaries $80,000
Loss from limited partnership acquired in 1999 (4,000)
What is Mary and Philip's adjusted gross income?

A. $59,000
B. $63,000
C. $84,000
D. $88,000
60. Judy and Larry are married and their combined salaries for the current year are $115,000. They actively
participate in the rental of two houses. For the current year they have the following losses:
Income/(Loss)
Limited Partnership A $ (5,000)
Limited Partnership B 8,000
Rental house X (5,000)
Rental house Y (2,000)
What is Judy and Larry's adjusted gross income?

A. $108,000
B. $111,000
C. $114,000
D. $115,000
E. $118,000
61. Sarah owns a passive activity that has a suspended loss of $18,000. The activity has a fair market value of
$35,000 and her adjusted basis in the activity is $20,000.
I. If Sarah sells the activity, she is allowed to deduct the $18,000 suspended loss.
II. If Sarah gifts the activity, she is only be allowed to deduct $15,000 of the suspended loss.

62. Norris owns a passive activity that has a suspended loss of $12,000. The activity has a fair market value of
$42,000 and his adjusted basis in the activity is $27,000.
I. If Norris gifts the property, he is allowed to deduct $3,000 of the suspended loss.
II. If Norris dies, none of the suspended loss is deductible.

63. Anna owns a passive activity that has a basis of $30,000 and a suspended loss of $7,000. Anna gifts the
passive activity to her daughter Patricia when the property has a fair market value of $42,000.
I. Anna will report an ordinary loss of $7,000.

II. Patricia's basis in the passive activity is $30,000.

I. Lightning damage.
II. Loss of the topsoil on a farm from a flood.

I. Diamonds stolen by thief, reported to police

II. Florida orange trees killed by a freeze.

66. Mario's delivery van is completely destroyed when a tree fell on it. Mario's insurance company pays him
$11,000 for the accident. The van cost $20,000 three years ago. Tax depreciation deductions of $6,000 have
been taken to date. The "Blue Book value" (i.e., fair market value) of the van is $12,000 on the accident date.
What is Mario's casualty loss on the van?
A. $ - 0 -
B. $ 1,000
C. $ 3,000
D. $ 8,000
E. $13,000
67. In April of the current year, Speedy Printing Company's delivery van is stolen. The van was originally
purchased in 2007 for $13,000, and its fair market value at the time of the theft is $4,000. The van has a zero
adjusted basis on the books of Speedy. The previous year, Speedy dropped theft insurance on the van, so it
receives no compensation for the loss from its insurance company. What amount of loss can Speedy deduct?
A. $ - 0 -
B. $ 4,000
C. $10,900
D. $12,900
E. $13,000
68. Jennifer's business storage shed is damaged by a hale storm. The shed is uninsured. Its adjusted basis is
$8,000. Just before the accident the shed is appraised for $10,000. In its damaged condition, the shed can be
sold for $4,000. What is Jennifer's loss from the storm?
A. $ - 0 -
B. $ 4,000
C. $ 6,000
D. $ 8,000
E. $10,000
69. Gomez, a self-employed consultant, is involved in a traffic accident with his business-use automobile. The
car is totally destroyed and Gomez's insurance policy reimburses him $8,000 for the fair market value of the car
immediately before the accident. His basis in the car is $11,000. What is the amount of Gomez's casualty loss
deduction?
A. $ - 0 -
B. $ 2,000
C. $ 3,000
D. $ 8,000
E. $11,000
70. Ford's automobile that he uses 100% for business is vandalized. The adjusted basis before the vandalism is
$3,000. The fair market value of the car before the vandalism is $7,000, and the fair market value of the
property after the vandalism is $2,000. Ford's insurance does not cover vandalism. What is Ford's loss deduction
for the year?
A. $ - 0 -
B. $1,000
C. $2,000
D. $3,000
E. $5,000
I. Loss on the sale of corporate stock.

II. Losses incurred in carrying on a trade or business.

I. Loss on the sale of a personal residence.

II. Loss due to the theft of business inventory.

73. All of the following are capital assets, except

A. Personal residence.
B. Land used for business parking lot.
C. Pickup truck used for personal transportation..
D. Corporate bonds held for investment purposes.
E. A hand-written letter by Dwight Eisenhower held in a private collection.
74. In addition to his salary, Peter realizes a $1,000 short-term capital gain and a $5,000 long-term capital loss.
The net effect of the capital asset transactions on Peter's adjusted gross income is
A. $ -0-
B. $ 1,000
C. $ (3,000)
D. $ (4,000)
E. $ (5,000)
75. During the current year, Terry has a short-term capital loss of $9,000 and a long-term capital gain of $3,000.
Due to these transactions Terry reports
A. A capital loss deduction of $3,000 and a loss carryforward of $3,000
B. A capital loss deduction of $3,000 and a loss carryforward of $6,000.
C. A capital loss deduction of $9,000.
D. A capital gain of $3,000 and a loss carryforward of $9,000.
E. A capital loss deduction of $6,000
76. Which of the following is true concerning capital losses and net operating losses for corporations:
Capital loss Net operating loss

A. Carried back 5 years Carried back 2 years
B. Carried back 5 years Carried forward 20 years
C. Carried back 3 years Carried forward 20 years
D. Carried back 5 years Carried forward 5 years
E. Carried back 3 years Carried forward 5 years
77. Billingsworth Corporation has the following net capital gains and losses for 2008 through 2011.
Billingsworth' marginal tax rate is 34% for all years.
2008 2009 2010 2011

$8,000 $3,000 $6,500 $(9,000)
In 2012, Billingsworth Corporation earned net operating income of $30,000. What is/are the tax effect(s) of the $9,000 net capital loss in 2011?
I. Corporate taxable income is $21,000.
II. The net capital loss will provide income tax refunds totaling $3,060.

78. During the current year, Schmidt Corporation has operating income of $75,000 and a net capital loss of
$25,000. What is Schmidt's taxable income?
A. $ - 0 -
B. $50,000
C. $72,000
D. $75,000
E. $90,000
79. Melinda and Riley are married taxpayers. During the year, they completed a single capital asset sale in
which a loss of $120,000 is realized on the sale ($15,000 amount realized, less $135,000 adjusted basis) of
qualified small business stock. How much of the loss can the taxpayers deduct?
A. $ 3,000
B. $ 53,000
C. $100,000
D. $103,000
E. $120,000
80. Rosanna, a single taxpayer, owns 2,000 shares of qualifying small business stock that she purchased for
$225,000. During the current year, she sells 800 of the shares for $30,000. If this is the only stock Rosanna sells
during the year, what can she deduct as an ordinary and capital loss?
Ordinary loss Capital loss

A. $58,000 $ -0-
B. $50,000 $ 3,000
C. $50,000 $10,000
D. $ -0- $ 3,000
E. $ -0- $60,000
81. Roscoe and Amy are married and own 12,000 shares of qualifying small business stock that they purchased
for $150,000. During the current year, they sell 10,000 shares of the small business stock to an unrelated third
party for $30,000. Eager to sell the remaining shares, they sell the other 2,000 shares to Amy's sister for $4,000.
In addition, they sell stock with a basis of $5,000 for $10,000. The stock was acquired in 2007. In 2010, Roscoe
and Amy loaned her brother, Carl, $8,000 to start his business. Carl has only repaid $2,000 on his documented
loan. During the year, Carl has filed for bankruptcy. The bankruptcy court liquidates all of Carl's assets and
Roscoe and Amy receive nothing from the liquidation.
I. Roscoe and Amy can deduct $120,000 as an ordinary loss on the small business stock.
II. Roscoe and Amy have a net short-term capital loss of $1,000.

82. Aunt Bea sold some stock she purchased several years ago for $10,000 to her nephew, Andy, for $6,000.
I. If this is Aunt Bea's only stock transaction, she can deduct only $3,000 of the loss.
II. If Andy sells the stock for $10,000, his taxable gain is $4,000.

83. Frasier sells some stock he purchased several years ago for $10,000 to his brother, Niles, for $6,000.
I. If this is Frasier's only stock transaction, he can deduct only $3,000 of the loss.
II. If Niles sells the stock for $10,000, his taxable gain is $4,000.

84. Georgia sells stock she purchased for $20,000 to her brother Billy for $12,000. Two years later, Billy sells
the stock to Allie, an unrelated individual, for $22,000. What is Billy's recognized gain or loss?
A. $ - 0 -
B. $ 2,000 gain
C. $10,000 gain
D. $ 8,000 loss
E. $ 6,000 loss
85. Lisa sells some stock she purchased several years ago for $10,000 to her brother Bart for $8,000. One year
later Bart sells the stock for $12,000. The tax consequences to Lisa and Bart are:
Lisa Bart
A. $2,000 loss $4,000 gain
D. $2,000 gain No gain or loss
E. $2,000 loss $2,000 gain
86. Olivia sells some stock she purchased several years ago for $9,000 to her brother Jack for $12,000. One year
later Jack sells the stock for $15,000. The tax consequences to Olivia and Jack are:
Olivia Jack
A. $3,000 gain $3,000 gain
D. $3,000 gain $6,000 gain
E. No gain or loss No gain or loss
87. Sylvia owns 1,000 shares of Sidney Sails, Inc., for which she paid $18,000 several years ago. On March 15,
she purchases 400 additional shares for $5,000. Sylvia sells the original 1,000 shares for $13,500 on April 1.
These are her only stock transactions during the year. Sylvia's capital loss deduction for the current year and her
basis in the new shares are:
Capital loss Basis

A. $3,000 $5,000
B. $2,700 $6,800
C. $4,500 $5,000
D. $3,000 $6,800
E. $2,700 $5,000
88. Hamlet, a calendar year taxpayer, owns 1,000 shares of Vanity Corporation common stock, which he
purchased two years ago for $4,000. Hamlet sells all of his shares on December 29, 2012, for $2,500. On
January 23, 2013, he purchases 600 shares of Vanity Corporation common stock. What is the amount of
Hamlet's recognized loss in 2012?
A. $ - 0 -
B. $ 600
C. $ 900
D. $1,500
E. $4,000
I. Tom realizes an $8,000 loss on the June 17, 2012, sale of 650 shares of Roadrunner Corporation common stock. He replaces the 650
shares with Hawke Inc., stock on July 8, 2012.
II. Rosie realizes a $6,000 loss on the December 29, 2012, sale of 40 Billings corporate bonds. Each bond has a face value of $1,000.
She replaces the Billings corporate bonds with 30 Redeemer corporate bonds, each with a face value of $1,000 on January 16, 2013.
The Redeemer bonds have the same interest rate, maturity date, but a different bond rating (AAA) as the Billings bonds.

I. Jim bought 500 additional shares of Alfa Gamma stock for $4,000 on December 2, 2012. Jim owned 2,500 shares after that purchase.
On December 26, 2012, Jim realizes a loss of $1,500 on the sale of 250 shares of Alfa Gamma stock.
II. Calvin realizes a $8,000 loss on the December 29, 2012, sale of Sloan corporate bonds. Each bond has a face value of $1,000. He
replaces the Sloan corporate bonds with the same number of Jackson corporate bonds, each with a face value of $1,000 on January
16, 2013. The Jackson bonds have a different interest rate and maturity date then the Sloan bonds but have the same bond rating
(AAA).

91. During the year, Daniel sells both of his personal vehicles. On January 10, he realizes a $9,000 loss on the
sale of the first car. On April 5, he realizes a $1,000 gain on the sale of the second car. Assume Daniel's salary
for the year is $50,000, and he has no other income. What is Daniel's Adjusted Gross Income?
A. $40,000
B. $41,000
C. $42,000
D. $50,000
E. $51,000
92. Samantha sells the following assets and realizes the following gains (losses) during the current year:
Home computer (personal) $ (600)

Municipal bonds 6,000
Carpeting from residence (2,000)
1956 Chevrolet auto 4,000
As a result of these sales, Samantha's adjusted gross income will:

A. Increase by $ 5,000.
B. Increase by $10,400.
C. Increase by $11,000.
D. Increase by $13,000.
E. Decrease by $ 600.
93. Willie sells the following assets and realizes the following gains (losses) during the current year:
Personal auto $(5,000)

Municipal bonds (7,000)
Furniture (6,000)
1% interest in oil well (8,000)
As a result of these sales, Willie's adjusted gross income will:
A. Decrease by $ 3,000.
B. Decrease by $ 4,000.
C. Decrease by $11,000.
D. Decrease by $15,000.
E. Not change.
94. During the current year, Cathy realizes
• a $3,000 loss on the sale of her personal use automobile held 4 years.
• a $4,000 loss on the sale of Itoham Corporation stock held 3 years for investment.
• a $2,000 gain on the sale of Sterling, Inc., bonds held 7 months for an investment.
Determine the tax consequences of these events.

A. Cathy deducts a $5,000 net capital loss.
B. Cathy deducts a $3,000 net capital loss.
C. Cathy deducts a $2,000 net capital loss.
D. Cathy deducts a $1,000 net capital loss.
E. Cathy deducts a $7,000 net capital loss.
95. During the year, Shipra's apartment is burglarized and her TV and stereo are taken. Her basis in the TV is
$1,200 and it has a fair market value of $700. Her basis in the stereo is $400 and it has a fair market value of
$600. What is Shipra's theft loss deduction (before considering the annual limitation based upon AGI)?
A. $ - 0 -
B. $ 900
C. $1,000
D. $1,200
E. $1,300
96. The Ottomans own a winter cabin in Durango, Colorado. They purchased the cabin in 1984 for $65,000.
During the current year, a blizzard partially destroys the cabin. The fair market value of the cabin after the
blizzard is $70,000. The insurance company estimates that the cost of repairing the cabin will be $40,000. The
insurance company will reimburse the Ottomans for 70% of the repair cost. What can they deduct as a casualty
loss if their adjusted gross income for the year is $80,000?
A. $ 3,900
B. $ 4,000
C. $ 8,000
D. $11,900
E. $12,000
97. Jerome owns a farm, which has three separate houses. He rents out two of the houses and lives in the other
house. During the current year, a tornado goes through his property causing damage to the houses. Rental House
A had a fair market value of $40,000 and an adjusted basis of $20,000, but it is not damaged by the tornado. A
local real estate agent told Jerome that because of the tornado, property values in the area have declined 10%.
Rental House B, which has an adjusted basis of $25,000, is worth $60,000 before the tornado and $20,000 after
the tornado. Jerome's insurance company pays him $20,000 for the damage to Rental House B. Jerome's
residence (which has an adjusted basis of $80,000) was worth $70,000 before it is totally destroyed by the
tornado. Jerome's insurance company reimburses him $60,000 for the loss of his residence. Ignore the
limitation based on Adjusted Gross Income.
I. Jerome deducts a loss of $5,000 on Rental House A.

II. Jerome deducts a loss of $35,000 on Rental House B.
III. Jerome's loss on his residence is $9,900.
IV. Jerome cannot deduct a loss on Rental House A.

C. Only statement III is correct.
D. Statements II and IV are correct.
E. Statements III and IV are correct.
98. If a corporation incurs a net operating loss, what would cause it to elect to carry the loss forward and forsake
the carryback? Explain.
If the corporation's future marginal tax rates are expected to be greater than its past marginal tax rates in the
carryback period it should consider foregoing the carryback. However, the corporation should also consider the
present value of foregoing the refund (i.e., time value of money) in the current period.
99. Tyrone is the president of JWH Manufacturing and owns 30% of its stock. JWH is organized as an S
corporation. During 2012, JWH has a loss of $240,000. At the beginning of 2012, Tyrone's amount at-risk in
JWH is $60,000.
a. What is Tyrone' deductible loss in 2012? What is Tyrone's at-risk amount at the end of 2012?
b. In 2013, JWH has a taxable income of $100,000. What is the effect on Tyrone's 2013 income? What is Tyrone's at-risk amount at the end
of 2013?
a. As an S corporation, the income and losses are passed through to its shareholders for taxation. In 2012, Tyrone's share of the loss is
$72,000 ($240,000 ´ 30%). Tyrone cannot deduct any loss in excess of his at-risk amount in JWH. Therefore, his 2012 loss deduction is
limited to $60,000 (reducing his at-risk amount to zero). The remaining $12,000 of his loss is suspended until his at-risk amount increases.
b. Tyrone's share of the income is $30,000 ($100,000 ´ 30%), which is included in his 2013 gross income. This increases his amount at-risk
by $30,000 and he is allowed to deduct the $12,000 loss from 2013 suspended due to the at-risk rules. By deducting the loss, Tyrone's at
risk amount at the end of 2013 is $18,000 ($30,000 - $12,000).
100. Why did Congress enact the at-risk rules?
To disallow the deduction of artificial losses generated by tax-shelter investments. The intent is to limit loss
deductions by individuals and closely held corporations on business and investment-related activities to the
amount of the taxpayer's actual economic investment.
101. Ronald is exploring whether to open a franchise of Quick Tax. He plans on forming an S corporation and
investing $15,000 of his own money while borrowing $45,000 from the bank to finance the purchase of the
necessary computing equipment and software. The bank has proposed two financing options. Under the first
option, the interest rate is only 10%, but the loan is recourse. The second option increases the interest rate to
15%, but the loan is nonrecourse.
a. Discuss the tax and non-tax aspects of the two options.
b. If Ronald incurs a $20,000 loss in the first year of operations, how much, if any, of the loss can he deduct if the loan is recourse?
Nonrecourse?
a. From a tax perspective, if Ronald decides to finance the purchase of the equipment and software with recourse debt, he will be at-risk
for $60,000. Assuming he has no income in the early years of the business, he is allowed to deduct up to $60,000 of Quick Tax losses
on his personal return. If he chooses to use nonrecourse debt, he can only recognize up to $15,000 (his investment) in losses. This
represents the amount he is at-risk in Quick Tax. Nonrecourse debt can only increase the amount an individual is at-risk for if the debt
is secured by real estate in a real estate activity. In this case, the business is not real estate.
The non-tax aspects Ronald should consider is whether he wants to put his personal assets at risk by using a recourse loan. Although
he will increase his cash flow by having a lower interest rate (15% versus 10%), this rate difference comes at a price -- his personal
assets. On the other hand, although he preserves the amount of assets he has at-risk by using a nonrecourse loan, he increases the
burden on his business to generate the necessary cash flow to make the interest payments.
b. Ronald only can deduct losses up to the amount he is at-risk for in the activity. He is considered to be at-risk only for the amount he
has invested in the activity and the amount in which he is personally liable. Nonrecourse debt is considered at-risk only if the debt is
secured by real estate in a real estate activity and made on reasonable commercial terms. Therefore, if Ronald uses a nonrecourse loan
he is at-risk for only $15,000 (the amount he invested) and he can only deduct $15,000 in losses. The remaining $5,000 is suspended
due to the at-risk limitation. If Ronald uses a recourse loan then he can deduct the full $20,000 loss because he is considered at-risk for
$60,000 ($15,000 + $45,000). The amount he is at-risk for at the end of the year is $40,000 ($60,000 - $20,000).
102. Discuss the difference(s) between the real estate professional exception and the active participation
exception when dealing with rental properties.
(1) The primary difference between these two classifications involves the purpose for the classifications. If a taxpayer qualifies under the
real estate professional exception the activity is considered an active trade or business of the taxpayer. Whereas, active participation is a
classification that is used after a rental real estate activity is deemed subject to passive loss rules. Active participation is one of the tests
for determining whether taxpayers with passive rental real estate activities can deduct up to $25,000 annually against active and/or
portfolio income.
(2) The actual tests to determine the classifications are also different. To qualify as a real estate professional, the taxpayer must spend more
than 50% of his/her personal service in a real property trade or business of which the taxpayer owns at least a 5% interest, the amount of
time spent in the real property trade or business must be greater than 750 hours, and the taxpayer must materially participate in the
rental activity (i.e., spend greater than 500 hours on the rental activity or meet the 100-hour test). To pass the active participation test, a
taxpayer does not need to have regular, continuous, and material involvement in the activity, implied by the above tests, and does not
need to meet any of the material participation tests. A taxpayer needs only to have significant and bonafide involvement. This is less
stringent than the test to qualify as a real estate professional. It merely requires the taxpayer to make management decisions, collect
rents, arrange for repairs, keep records, etc., or to hire a rental management agent to perform these services. The taxpayer must own
more than a 10% interest in the rental property.
103. Classify and briefly explain the proper classification for each of the income-generating activities below.
The classifications are either, "active," "passive," or "portfolio."
a. Ford Motor Company Bond interest.
b. Commissions earned from insurance sales.
c. Sale of Microsoft common stock held as an investment.
d. Income from a limited partnership investment.
e. Rental income from an apartment building and the individual owner does not qualify as a real estate professional.
f. Gain from the sale of rental real estate and the individual owner does not qualify as a real estate professional.
a. Portfolio income. Derived from securities.
b. Active income. Materially involved in earning the revenue.
c. Portfolio income. The sale of the asset has the same classification as the income from the asset.
d. Passive income. Limited partnerships are passive by definition.
e. Passive income. Rents are passive unless the individual owner qualifies as a real estate professional.
f. Passive income. Rents are passive by definition, and gains (or losses) realized from the disposition of the asset are also passive, unless the
individual owner qualifies as a real estate professional.
104. A taxpayer has the following income (losses) for the current year:
Active Income Portfolio Income Passive Income

$98,000 $22,000 $(30,000)
What is the taxable income (loss) of the taxpayer if:

a. The taxpayer is a publicly held corporation?
b. The taxpayer is a closely held corporation?
c. The taxpayer is an individual and the passive income is not from a rental activity?
d. The taxpayer is an individual and the passive income is the result of a rental activity for which the taxpayer qualifies as a real estate
professional.
e. The taxpayer is an individual and the passive income is the result of a rental activity for which the taxpayer fails to qualify as a real
estate professional but meets the active participation test?
a. Publicly held corporations are not subject to the passive activity loss rules. The taxpayer reports income of $90,000 ($98,000 + $22,000
- $30,000).
b. A closely held corporation is allowed to deduct passive losses against the active income of the corporation, but not against portfolio
income. In this case, the $30,000 passive loss can be deducted against the $98,000 of active income, leaving the corporation with a
taxable income of $90,000 [$22,000 + ($98,000 - $30,000)].
c. An individual cannot deduct passive losses against active or portfolio income. The individual taxpayer has taxable income of $120,000
($98,000 + $22,000) and a suspended loss of $30,000.
d. An individual who qualifies as a real estate professional can deduct all losses from the activity against active and portfolio income. The
taxable income is $90,000 ($98,000 + $22,000 - $30,000).
e. An individual who is an active participant in a rental real estate activity is allowed to deduct up to $25,000 of losses from rental
activities against active and portfolio income. However, because the taxpayer's adjusted gross income before considering the passive
loss exceeds $100,000 ($98,000 + $22,000 = $120,000), the $25,000 maximum loss is reduced to $15,000 {$25,000 - [($120,000 -
$100,000) ´ $.50]}. The taxable income is $105,000 ($98,000 + $22,000 - $15,000) and a suspended loss of $15,000
105. Maryanne is the senior chef for Bistro 501 Restaurant. Discuss whether the following losses are affected
by the passive activity rules.
a. Maryanne has a $4,500 loss from her ownership interest in a catfish-farm limited partnership. Maryanne is a limited partner.
b. Maryanne has a $7,000 loss from her ownership interest in a feeder-lamb limited partnership. Maryanne is a general partner and is
responsible for day-to-day management decisions.
c. Maryanne has a $11,000 loss from her ownership of a low-income housing project.
d. Maryanne owns a rental house across the street from North Forest College and actively participates in managing the rental property. The
rental property generates a loss of $5,000 for the current year.
a. A limited partnership interest is passive by definition. Therefore, the loss can only be used to offset passive income generated by any of
Maryanne's investments.
b. A general partnership interest is passive if Maryanne does not materially participate in the activities of the enterprise. In this case,
Maryanne is the day-to-day decision maker. As long as she functions in this capacity over 500 hours in the current tax year, the loss is not
passive. Maryanne can deduct the loss against other active and portfolio income.
c. Losses from low-income housing investments are excluded from the passive activity loss limitation rules. These losses can be deducted
from active or portfolio income.
d. Rental losses are passive by definition. However, a special exception exists that allows an individual taxpayer owning at least 10% of the
investment to deduct up to $25,000 in rental losses annually. If the taxpayer's AGI exceeds $100,000, the maximum amount deductible is
reduced by $.50 for each dollar of AGI over $100,000.
106. Erline begins investing in various activities during the current year. Unfortunately, her tax advisor fails to
warn her about the passive loss rules. The results of the three passive activities she purchased for the current
year are:
Income
(Loss)
Pas$(36,00
siv 0)
e
Ac
tivi
ty
1
Pas
siv 22,000
e
Ac
tivi
ty
2
Pas
siv (4,000)
e
Ac
tivi
ty
3
a. If Erline's adjusted gross income is

$170,000 before considering the effect of
the passive activities, what will Erline's
adjusted gross income be for the current
year? Fully explain the effect of the
passive activity investments on her
adjusted gross income.
b. Because Passive Activity 1 has been
such a loser, Erline is considering selling
it. However, she is concerned about the
effect of the sale on her taxable income
because her tax advisor told her that her
basis in the activity is only $14,000 and
she could sell it for $32,000. Explain the
effect on her taxable income if she sells
Activity 1 for $32,000.
a. Erline's adjusted gross income will be $170,000. Erline will include the $22,000 of income passive activity 2 in her gross income and she
will deduct $22,000 of losses from passive activities 1 and 3. The $18,000 ($22,000 - $36,000 - $4,000) net passive loss is suspended and
carried forward to the next year.
b. Erline will realize a capital gain of $18,000 ($32,000 - $14,000) from the sale of passive activity 1. However, she will be allowed to deduct
the $16,200 [$18,000 ´ ($36,000 ¸ $40,000)] suspended loss on the activity. Therefore, her taxable income will only increase by $1,800 if
she sells it. In addition, if she has held the passive activity 1 for more than 12 months, she will have a long-term capital gain of $18,000
and an ordinary loss of $16,200.
107. Brent is single and owns a passive activity that has a basis of $25,000 and a suspended passive loss of
$8,000. He acquired the passive activity in 2010. Brent's taxable income from active and portfolio income is
$85,000, and he has no other capital gains or losses for the year.
a. What is the effect on Brent's taxable income if he sells the passive activity for $42,000?
b. What is the effect on Brent's taxable income if he sells the passive activity for $13,000?
c. What is the effect on Brent's taxable income if he dies this year while the fair market value of the passive activity is $30,000?
d. What is the effect on Brent's taxable income if he dies this year while the fair market value of the passive activity is $18,000?
e. What is the effect on Brent's taxable income if he gives the passive activity to his brother Norm when the fair market value of the passive
activity is $30,000?
a. Any suspended loss on a passive activity is deductible in full when an entire interest in an activity is disposed of through a sale of the
activity. In this case, Brent has a capital gain of $17,000 ($42,000 - $25,000) on the sale of the activity and a deduction of $8,000 for the
suspended loss on the activity. This results in income of $94,000 ($85,000 +$17,000 - $8,000). However, the $17,000 capital gain is taxed
at 15%. As a result, $17,000 of his $94,000 taxable income is taxed at 15%.
b. In this case, Brent has a $12,000 capital loss on the sale of the passive activity and is allowed a deduction for the $8,000 suspended loss.
However, if Brent has no capital gains during the year only $3,000 of the capital loss is deducted in the year of sale and the remaining
$9,000 is carried forward. As a result, Brent's taxable income is $74,000 ($85,000 - $3,000 - $8,000).
c. A deduction is allowed for a suspended loss on a passive activity held at death, but only to the extent of the excess of any suspended loss
over the unrealized gain on the passive activity. In this case, the unrealized gain is $5,000 ($30,000 - $25,000) and the suspended loss is
$8,000, resulting in an excess of $3,000. Therefore, Brent is allowed a deduction of $3,000. As a result, Brent's taxable income is $82,000
($85,000 - $3,000).
d. A deduction is allowed for a suspended loss on a passive activity held at death, but only to the extent of the excess of any suspended loss
over the unrealized gain on the passive activity. In this case, there is no unrealized gain ($18,000 - $25,000 = $7,000 loss) and Brent is not
allowed a suspended loss deduction. As a result, Brent's taxable income is $85,000.
e. A taxpayer cannot deduct the amount of the suspended loss when a passive activity is gifted. The donee has a basis in the activity equal to
the sum of the donor's basis and the amount of the suspended loss. Norm's basis in the activity is $33,000 ($25,000 + $8,000). Neither
Brent nor Norm currently receives a deduction for the $8,000 suspended loss. This treatment prevents Norm from using the suspended loss
deduction against passive income. As a result, Brent's taxable income is $85,000.
108. For each of the following situations, determine whether the item is deductible, and discuss any limitations,
which might be placed on the deduction.
a. Carl owns an office building that he rents out to various businesses. During the current year, rental income from the building is $95,000.
Carl's allowable expenses relating to the office building are $150,000.
b. Edward sells stock to an unrelated party at a $70,000 loss during the current year.
c. Lee sold furniture at a loss of $5,000 during the current year.

a. Carl realizes a $55,000 loss ($95,000 - $150,000) from his rental activity. However, rental losses are passive losses by definition and are
not deductible unless Carl meets either the real estate professional exception or active participation exception. If he is qualified real estate
professional, the real estate activity is considered active and he can offset the loss against his other income. To be considered a material
participant he must spend more than 500 hours managing the office building (or meet the 100-hour test), spend more than 750 hours in real
property trades or businesses and spend more than 50% of his working time in real property trades or businesses of which he owns a 5%
interest. If Carl does not meet the real estate professional exception, he might be able to offset up to $25,000 of the loss if he meets the
active participation exception. To qualify as an active participant, Carl must own at least 10% of the property and significantly participate
in the management of the property. Carl is able to deduct $25,000 of the loss if his adjusted gross income without considering the loss is
$100,000 or less. If his adjusted gross income is between $100,000 and $150,000, the $25,000 is phased-out by 50 cents for every dollar of
adjusted gross income in excess of $100,000 until the $25,000 is phased out at $150,000.
b. Stock is generally considered a capital asset. Therefore, the $70,000 is a capital loss. Edward must net this loss with capital gains and
losses from other transactions during the current year. If a net capital loss results from the netting procedure, only $3,000 of it can be
deducted in the current year. The excess is carried forward indefinitely. If Edward has no other capital asset transactions during the current
year, he can deduct $3,000 of the loss and the remaining $67,000 ($70,000 - $3,000) is carried forward. Alternatively, if the stock qualifies
as small business stock, Edward can deduct $50,000 as an ordinary loss ($100,000 if married). The $20,000 difference ($70,000 -
$50,000), assuming he is a single taxpayer, is treated as a capital loss, of which $3,000 is deducted in the current year.
c. If the furniture is business-use prior to the sale, the loss is deductible against ordinary income. If the furniture is personal in nature, the loss
is disallowed. Deductions are not permitted for losses on personal use assets.
109. For each of the following situations, determine whether the item is deductible, and discuss any limitations
that might be placed on the deduction.
Rioters damage Margarita's business building, which has an adjusted basis of $50,000, during the current year.
a. Assume the building is totally destroyed. The cost of replacing the building is estimated to be $55,000. Margarita's insurance reimburses
her $32,000.
b. Assume the building is severely damaged. Before the riot, the building is worth $55,000. The insurance adjuster estimates the value of the
building after the damage at $20,000. Margarita's insurance reimbursed her $32,000.
a. Margarita can deduct $18,000 ($50,000 - $32,000) as a business casualty loss. The measure of loss on business property that is fully
destroyed is the property's adjusted basis, $50,000. The $50,000 loss is reduced by the $32,000 insurance proceeds.
b. Margarita can deduct $3,000 ($35,000 - $32,000) as a business casualty loss. The measure of loss on business property that is partially
destroyed is the lesser of 1) the decrease in the fair market value of the property, $35,000 ($55,000 - $20,000) or 2) the property's adjusted
basis, $50,000. The $35,000 decrease in market value attributable to the casualty is reduced by the $32,000 of insurance proceeds.
110. During the year Wilbur has the following capital gains and losses:
Short-term capital gains $ 4,500

Short-term capital losses (6,000)
Long-term capital gains 4,200
Long-term capital losses (7,500)
What is the effect of the capital gains and losses on Wilbur's taxable income?
The short-term gains and losses are netted together to determine the net short-term capital gain/loss position for
the year. Also, the long-term gains and losses are netted together to determine the net long-term capital
gain/loss position for the year. Wilbur has a $3,500 net short-term capital loss and a $3,300 net long-term
capital loss.
Net short-term capital loss ($4,500 - $6,000) $(1,500)

Net long-term capital loss ($4,200 - $7,500) (3,300)
Capital loss deduction $ 3,000

Capital loss carryforward $(1,800)
The deduction for capital losses is limited to $3,000 per year, with any excess capital loss carried forward for netting in subsequent years. Because
short-term capital losses are used first, Wilbur has a capital loss carryforward consisting of a $1,500 long-term capital loss.
111. The Corinth Corporation is incorporated in 20099 and had no capital asset transactions during the year.
From 2009 through 2012, the company had the following capital gains and losses:
2009 2010 2011 2012

Capital Gains $18,000 $ 12,000 $ 20,000 $ 21,000
Capital Losses (7,000) (16,000) (26,000) (31,000)
If Corinth's marginal tax rate during each of these years is 34%, what is the effect of Corinth's capital gains and losses on the amount of tax due each
year?
The gains and losses must be netted together. Net capital gains are subject to the corporate tax. Net capital
losses may not be deducted in the year of the loss. Losses may be carried back three years and forward five
years and used to offset net capital gains in the carryover period. Carrybacks result in a tax refund.
Carryforwards reduce the tax paid in future periods on net capital gains. For Corinth:
2009 2010 2011 2012

Net gain (loss) $11,000 $(4,000) $(6,000) $(10,000)
The 2010 loss is carried back to 2009 and a $1,360 ($4,000 ´ 34%) refund is obtained. The 2011 loss is also carried back to 2009 and results in a
$2,040 ($6,000 ´ 34%) refund. In 2012, $1,000 of the $10,000 loss is carried back to 2009 resulting in a $340 ($1,000 ´ 34%) refund. The remaining
$9,000 ($10,000 - $1,000) net capital loss from 2012 is carried forward to 2013 and may be used to reduce capital gains for a maximum of five years.
112. Fowler sells stock he had purchased for $22,000 to his brother, Phil, for $15,000. What is the tax
consequence of the sale to Fowler and Phil? Explain the three possible tax consequences if Phil sells the stock
two years later to his neighbor?
Fowler and his brother are related parties. Fowler is not allowed to deduct any of the $7,000 loss on the sale of
the stock to his brother.
(1) If sale proceeds from Phil's sale of the stock to his neighbor are less than his basis, $15,000, his realized and recognized loss is
determined by subtracting the sale proceeds from his basis, $15,000.
(2) If Phil sells the stock to his neighbor for more than $15,000 but less than his brother's original cost, $22,000, Phil can use his
brother's disallowed loss to offset his gain but cannot reduce the gain below zero. The net effect is that Phil will not realize any
gain or loss on the sale.
(3) If Phil sells the stock to his neighbor for more than his brother's original cost, $22,000, Phil's gain on the sale is computed by
subtracting the sum of his basis, $15,000, and his brother's disallowed loss of $7,000 from the sale proceeds.
113. Gloria owns 750 shares of the Greene Company that she acquired in 2008 for $9,000. On June 12 of the
current year, she sells 500 shares of Greene for $4,000. Two weeks later on June 26, Gloria purchases 200
shares of Greene for $2,200. What are the effects of the June 12 sale? Explain.
The sale of the 500 shares results in a realized loss of $2,000. However, 200 of the 500 shares sold are replaced
within the 30-day period that defines a wash sale. Therefore, the loss on the 200 shares replaced is disallowed
and added to the basis of the 200 replacement shares purchased on June 26. The loss on the 300 shares that are
not replaced is allowed as a capital loss. The disallowed loss is $800 and the allowable loss is $1,200:
Amount $ 4,000
realized
Less: Basis [($9,000 ¸ 750 = $12) ´ 500 shares] (6,000)
Realized loss $(2,000)
Disallowed loss 800
on 200 shares
[(200 ¸ 500) ´
$2,000]
Allowable loss $(1,200)
on 300 shares
not replaced
The basis of the 200 shares purchased on June 26 is $3,000 ($2,200 cost + $800 disallowed loss on wash sale).
114. Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain?
Tax avoidance is possible when a sale is at a loss. All gains are included in income (All-inclusive income
concept) unless specifically excluded. Loss deductions are more susceptible to manipulation by taxpayers.
115. Hubert and Jared are both involved in automobile accidents, which totally destroy their automobiles this
year. Hubert and Jared purchased the automobiles at the same time for the same cost, and neither of them
receives any insurance reimbursement for the destruction of their automobiles. Before considering the effect of
their casualties, Hubert and Jared have identical adjusted gross incomes. Although Hubert and Jared are
seemingly alike in every aspect regarding the automobiles, Hubert is allowed a deduction of $2,000 for the
destruction of his automobile and Jared is not allowed any deduction for his automobile. What causes this
disparity of treatments between Hubert and Jared? Explain. Use examples if necessary.
The difference is usage. Hubert uses his automobile for business. Jared uses his automobile for personal
purposes. The rules for deductibility of casualty losses are different for the two types of asset usage. Business
losses are deducted in full. Personal casualty losses are limited to the excess over ($100) + (10% ´ AGI). So, if
Hubert and Jared's AGI are both greater than $19,000, Jared would not get a deduction for the $2,000 casualty
loss, while Hubert would receive a full $2,000 deduction.
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“Still, we must remember how singularly, of late years, the knowledge of the
introduction of cholera by persons coming from infected districts has increased, and
how very striking are the instances of this kind already recorded in several works on
influenza.
“In some cases, again, isolation or seclusion of a community, as in prisons, has given
immunity; or at least that community has not been attacked.”
The great rapidity of spread has caused even in 1918 some temporary doubt as to the
contagiousness of the disease. Thus, Zinsser wrote:
“The opinion of direct and indirect transmission from man to man is also well
supported by a detailed study of the epidemiology of individual outbreaks. In our own
experience with epidemics such as those at Chaumont, Baccarat and other places, the
suddenness with which the malady attacked large numbers of people at almost one and
the same time, caused me at first to be exceedingly skeptical of accepting transmission
by contact as the only means of conveyance. We considered food and insect transmission
as possibilities, and tried our best to find grounds for involving such agencies. But in
every case we were forced to return to the conclusion that direct and indirect contact
between men came nearest to doing justice to all observed facts.”
There have been many examples reported from personal experience to show that
influenza is transmitted from man to man. Two objections, however, have had to be met,
before this view was generally accepted. First, it has been claimed by some that the
disease spread more rapidly from an assumed focus than individuals could travel, and
second, that instances were on record of cases occurring spontaneously in isolated
communities. Yet a third argument formerly raised against the contagious character of
the disease was the claim that it broke out in mass attacks, that large numbers became ill
on the same day without the occurrence of isolated antecedent cases. The splendid work
of epidemiologists following the 1889 epidemic appears to have answered all of these
objections. Many, such as Leichtenstern, have gone into great detail on this subject. In
fact, at that time this was the question of greatest importance. Today we assume the
correctness of the hypothesis, and pass on to consideration of other subjects of more
recent development. We will, therefore, review very hurriedly some of the evidence
quoted to prove that influenza is transmitted only from man to man and only by human
intercourse.
Isolated places.—Has it ever been shown that individuals completely isolated from
communication with communities where influenza is present have, during an epidemic,
developed the disease? Leichtenstern, after a comprehensive review, concludes as
follows: “We have not a single example on record where influenza has attacked
individuals in completely isolated localities, as on mountain tops and mountain passes.
Study of this has been undertaken in Switzerland by F. Schmid. The same has been true
of ships at sea, as has been shown chiefly from the English Marine Reports. There have
been reports of influenza occurring in mid-ocean and particularly in the earlier
epidemics, but the information has been insufficient.”
Parkes at even an earlier period observed: “I cannot but consider that we require
better evidence of ships being attacked in mid-ocean. In some of the quoted instances
the ships had been at a port either known to be infected or in which influenza was really
present, although it had not become epidemic. As we are ignorant of the exact period of
incubation some men may have been infected before sailing.”
Critical investigation into stories of spontaneous infection in isolated localities such as
ships at sea and island lighthouses will quite invariably demonstrate that these popular
reports have been distortions of the actual facts. One or two examples will suffice.
Abbott records an example: “An impression having gained some credence that influenza
had appeared on board the squadron of naval vessels which sailed from Boston in
December, 1889, while on their course across the Atlantic and before their arrival in
Europe, a letter was addressed by the writer to the Bureau of Medicine and Surgery of
the United States Navy for information upon this point, to which a reply was received, as
follows:
“The ‘Chicago,’ ‘Boston,’ ‘Atlanta’ and ‘Yorktown’ left Boston December 7, 1889, for
Lisbon, Portugal. The first three arrived at Lisbon on December 21st without having
touched at any port en route. The ‘Yorktown’ arrived at that port December 23d, having,
stopped about twenty-four hours at Fayal, Azores.... Influenza first appeared on the
‘Chicago’ December 23d, on the ‘Boston’ December 28th, on the ‘Atlanta’ December
30th and on the ‘Yorktown’ December 28th.
“Influenza was prevailing in Lisbon at the date of arrival of the squadron.”
In March, 1920, the author was notified of a somewhat similar story which he
undertook to trace. The results show well the inaccuracy of verbal transmission through
several individuals. A letter was first sent to the Quarantine Officer at Portland, Maine:
“It has been reported to us that in a lighthouse just outside of Portland, Maine, there has
been a rather interesting prank played by influenza. We are told that three men and one
woman live in the lighthouse; that during the 1918 influenza epidemic the woman
contracted the disease while none of the men became sick, and that in the present
epidemic all three of the men became sick with the disease and the woman remained
well. It was claimed that they had had no communication with the mainland for some
time before the men became ill,” etc.
The reply was as follows: “I have inquired of the Light House Inspector’s office in
Portland and they know of no stations to which the terms of your inquiry would apply.
“At the Boon Island station, there are three keepers with families. At the Half Way
Rock station, there are three keepers but no woman. The Inspector does not seem to
know of any station where there are three men and one woman.”
A second letter, sent to the Inspector of Lighthouses at Portland brought corroborative
information:
“The Boon Island Light Station was stricken by this epidemic in the following manner:
The keeper, his wife and five children were all stricken, the keeper himself having had
the hardest battle, having apparently been subject to same while ashore in Portsmouth,
N. H. after provisions, supplies, etc. The 2d assistant’s wife and two children were also
stricken, but the 2d assistant, himself, and the 1st assistant keeper did not contract the
malady in spite of the fact that they were all confined on a small island working together
at the station.
“During the year 1920 none of the keepers or their families, consisting of thirteen in
number, were affected. The Halfway Rock Light Station where three keepers are
employed did not contract this malady either in the years 1918 or 1920.
“For your information I might add that during the inspection trip in the months of
January, February and March, 1920, all of the light stations in this district were visited,
and it was found that they were all enjoying good health and had not been visited by the
epidemic, with the possible exception of three stations which are located either on the
mainland or close to where the keeper or his family were able to visit the nearby cities or
towns.”
Although it has not been shown that completely isolated places have been visited by
the disease, there is abundant evidence that such places have remained influenza free as
long as the isolation has remained complete. Islands and lighthouses, which have not
been in communication with the mainland, individuals living isolated on mountain tops,
and ships at sea remained free from influenza even in the presence of a pandemic, as
long as they did not come into communication with individuals sick with the disease.
The following places remained free from influenza throughout the 1889 epidemic: the
Isle of Man, several of the islands of the West Indies, particularly the Bahamas, Granada
and St. Lucia, also the British Honduras, British Guiana, and the Seychelle Islands.
Even in 1918, when the paths of commerce reached nearly every portion of the world,
we have examples of relative immunity of isolated places. Thus we know that the
Esquimaux were attacked late in the course of the pandemic, and we have the statement
of Barthélemy who traveled in 1919 to some of the oasis towns of the Sahara Desert, and
there discovered that there had not only been no influenza up to that time, but also that
they had not even heard of the pandemic.
Another type of isolated place is the closed institution. As early as 1709, Lancisi
remarked that the prisons of the Inquisition in Rome remained free from influenza.
Twenty-one prisons in Germany in 1889–90 remained entirely free from the disease.
This was true of 39 prisons in England, some of which were in cities where the epidemic
was most extensive. Linroth, who observed this same phenomenon in Sweden, makes
the wise remark that, “the influenza conquers more easily the space of 500 to 1,000
kilometers than it does the small barrier made by a prison wall.” A convent in
Charlottenburg housing one hundred women remained entirely free during the 1889–90
epidemic.
As a rule institutions of this sort have been unable to maintain a complete quarantine
throughout the period of an epidemic, and the relative immunity has been demonstrated
more in late invasions, at a time when the restrictions have become somewhat lax. Thus,
in 1918, Winslow and Rogers, report that in an orphan asylum in New Haven,
Connecticut, which had completely escaped during the month of October when the
epidemic was at its height, one of the Sisters and the priest in charge came down with
influenza about December 15th. By the 27th of December 127 cases had occurred in the
institution within twenty-four hours, and by January 7th there had been 424 cases, with
seven deaths out of a total population of 464. The probable source of the sudden
outbreak of December 27th seems to have been the Sister first affected who, when
convalescent, resumed her duties in the kitchen, which included the inspection and
handling of the milk given out to the children.
Crowd gatherings.—Yet another phenomenon which would lead us to conclude that
human intercourse is the most potent factor in the transmission of influenza is the fact
that there is frequently a high increase in the influenza rate following crowd gatherings.
Parkes observed long ago that persons in overcrowded habitations, particularly in some
epidemics, suffered especially, and several instances are on record of a large school or a
barracks being first attacked and the disease prevailing there for some days, before it
became prevalent in the towns around.
In England, the weekly market played an important role in the spread of the disease in
1889. One frequently saw such reports as that: “The first case of influenza was a man
who went to London daily.” Or, “All the earliest cases were men going to London daily,
while their wives and families were later affected.”
In the epidemics at San Quentin Prison, it was noted that apices of incidence usually
occurred on Tuesday and Wednesday. During the first epidemic it was these days of the
second and third weeks. Stanley sees a direct connection between this fact and the fact
that every Sunday morning large groups of the men were crowded together in a
comparatively small auditorium where they saw moving pictures. On Sunday, October
20th, they sought to eliminate this source of spread by having a band concert in the open
air, but the prisoners crowded around the band and were loud in their cheers, and on the
following day there was a large increase in hospital admissions.
On November 24th after the second epidemic had apparently ceased the picture
shows were again started after having been closed for over six weeks. The following
Tuesday and Wednesday twenty-four well defined new cases were admitted to the
hospital. On Thanksgiving Day there was a field meet between the various departments
of the prison. About 200 prisoners took active part, while 1,600 prisoners were
spectators. The meet was held in the open air, but the prisoners were closely packed and
they cheered and yelled. For the three days following this celebration there were 9, 5 and
8 patients admitted respectively.
In discussing the recrudescence of influenza in Boston in November and December,
Woodward remarks as follows:
“Whether or not it may be more than a succession of coincidences it is certainly of
interest to note that the November outbreak of influenza showed itself three days after
the Peace Day celebration on November 12th, when the streets, eating places and public
conveyances were jammed with crowds; that the December epidemic began to manifest
itself after the Thanksgiving holiday, with its family re-unions and visiting; and that
reported cases mounted rapidly during the period of Christmas shopping, reaching a
maximum a week after the holiday.” That this may have been a coincidence is indicated
by the fact that, according to reports by Pearl and others this was not consistently true in
other large cities.
Dr. Meredith Davies records the case of a hostel in Wales accommodating 200
students. Infection was introduced on October 19th on the occasion of a dance attended
by some students from an infected institution in the neighborhood. Four cases occurred
on the 20th and within the short space of five days seventy-nine students out of the 200
were attacked.
Parsons found numerous similar examples in the epidemic of 1889. In 1918 it was
frequently observed that among American Soldiers in France, those troops quartered in
barracks suffered a much more rapid spread of the disease than those billetted out
among the houses of the towns.
Mass attack.—Another argument formerly raised against the contagious character
was the claim that it broke out in mass attack, and large numbers became ill on the same
day without the occurrence of isolated antecedent cases. The first cases of such epidemic
diseases as the plague and small pox became a matter of record because of the
accompanying high mortality, while in influenza, with its relatively low death rate the
record usually begins only after a comparatively large mass of individuals have been
attacked.
Watson in 1847 observed as follows: “Although the general descent of the malady is,
as I have said, very sudden and diffused, scattered cases of it, like the first droppings of a
thunder shower, have usually been remembered as having preceded it. The disorder is
most violent at the commencement of the visitation; then its severity abates; and the
epidemic is mostly over in about six weeks. Yet the morbific influence would seem to
have a longer duration. In a given place nearly all the inhabitants who are susceptible of
the distemper suffer it within that period, or become proof against its power. But
strangers, who, after that period, arrive from uninfected places have not, apparently, the
same immunity.”
Parkes in 1876 observed that, “When the disease enters a town it has occasionally
attacked numbers of the inhabitants almost simultaneously. But more frequently its
course is somewhat slower; it attacks a few families first and then in a few days rapidly
spreads; the accounts of thousands of persons being at once attacked at the onset of the
disease are chiefly taken from the older records, in which the suddenness of the
outbreak is exaggerated. Frequently, perhaps always, in a great city the outbreak is made
up by a number of localized attacks, certain streets or districts being more affected than
others, or being for a time solely affected, and in this way it successively passes to
different parts of the city. It has generally occurred in a great city before appearing in the
smaller towns and villages round it and sometimes these towns, though in the
neighborhood, have not been invaded for some weeks.
“In some cases and perhaps a large number, it breaks out after persons ill with
influenza have arrived from infected places.
“The decline in any great town is less rapid than its rise, and usually occupies from
four to six weeks, or sometimes longer.”
Detailed studies of the Munich epidemic of 1889 and numerous similar studies of the
recent epidemic, which will be referred to later, have shown a period of two or three
weeks of steadily increasing numbers of cases before the height of the epidemic was
reached.
Droplet infection and spread through inanimate objects.—The actual mode of spread
of the virus of influenza from one individual to another is unknown. The more generally
accepted explanation is that the infecting agent leaves the body through the respiratory
tract, usually in the spray of coughing or talking; contagion is by droplet infection, as is
sometimes the case in other respiratory infections. Thorne and others have called
attention to the capillary congestion of the conjunctivae very early in the disease. They
suggest that possibly the mucous membrane of the eye is the site of infection.
There has recently been considerable discussion concerning the spread of influenza
through inanimate objects.
Leichtenstern reviews the reports of 1889–93 in which influenza was supposed to
have been transmitted through wares, merchandise and other inanimate objects. He
concluded that the evidence in all of the cases cited was insufficient for conclusive proof.
Such an example was the supposed importation of the disease in goods sent from Russia
to the Grands Magazins du Louvre at Paris. In one day 100 people became ill and in a
few more 500 were sick with influenza. The explanation was that the germs had been
imported in goods sent from Russia to the store. Detailed investigation showed that this
could not have been the case because no goods had been received from Russia for a
period of three years. Another example is that of one of the two winter caretakers at the
St. Gothard Hospice. One of the two men went down into the valley where he purchased
supplies. Ten days after his return the man who had remained in the Hospice fell ill with
influenza while his comrade remained well. It was stated that influenza was introduced
into Basel by goods shipped to that place from the Magazins du Louvre in Paris. The first
case occurred in a man who had been working at unpacking these goods.
Lynch and Cumming believe that droplet infection plays but a minor role in the
spread of sputum-borne diseases, but that insanitary methods of washing dishes and
eating utensils was the chief cause for the high rates of “sputum-borne” infections both
in army and civilian life in 1918. They found that among 31,000 troops eating from
tableware which was cleaned by kitchen police, the influenza rate was 51 per 1,000,
while among 35,000 eating from mess kits which each individual washed himself the
rate was 252 per 1,000. “Eighty-four per cent. of the cases occurred among those whose
hands were contaminated by washing their own eating utensils.”
Among 17,236 employees of hotels, restaurants and department stores, who ate from
machine washed dishes, there occurred 349 cases of influenza, while among 4,175 who
ate from hand washed dishes there were 429 cases. The rate was but 20 per 1,000 in the
former, while in the latter group it reached 103 per 1,000. Here again the chances of
infection between the two groups were as one is to five.
These authors have records covering 252,186 individuals in scattered institutions in
the United States. Among those eating from machine washed dishes the rate was 108 per
1,000 while those eating from hand washed dishes suffered at the rate of 324 per 1,000.
The ratio was 1 to 3 between the two groups. Seventy-five per cent. of the cases occurred
in that group which ate from dishes not disinfected with boiling water. They do not state
the number of individuals in each of the two groups.
Lynch and Cumming claim that in the act of coughing only a few organisms are
expelled from the mouth, rarely over 1,500, and conclude that transmission by direct
contact through the air route but rarely, if ever, takes place. While about 1,500
organisms are expelled onto the floor by an act of coughing, a sterile glove wiped across
the lips may pick up nearly 2,000,000 organisms. Such organisms may be readily
transferred to inanimate objects which are handled by many people.
Hemolytic streptococci and pneumococci may be isolated with great regularity from
the hands of carriers or patients, from table ware, inanimate objects touched by these
patients, and from floor dust. Diphtheria and tubercle bacilli have been isolated from the
hands and eating utensils of patients. The average count of a large number of restaurant
dishwater specimens was 4,000,000 bacteria per c.c. The temperature of this water
averaged 43° C. and the dishes were practically never scalded. The water was often so
highly polluted, “that the dishes are more highly contaminated after they are washed
than before washing begins. The spoon or fork is often freer from organisms just after
being used by the restaurant patron than when taken from the restaurant’s polluted dish
water.”
Major John S. Billings, epidemiologist at Camp Custer, reported that one of the larger
organizations did not properly observe the regulation requiring that all mess kits and
table equipment be properly sterilized. The disease appeared early and spread unusually
rapidly in this particular organization.
In summarizing the subject of transmission through utensils, we may say that the
evidence is suggestive but inconclusive. It is possible, even probable, that this is one
mode of transmission. That it is the most important has not been proved. Lynch and
Cumming do not take into consideration that the regiments with more sanitary methods
of cleansing the dishes are apt to be those regiments with more sanitary habits
throughout their daily routine. Those restaurants using mechanical dish washers are
usually the cleaner restaurants.
Pontano in Italy is quoted by the Office International d’Hygiène Publique as having
observed in his epidemiological study that there was a constant connection between the
living conditions and the severity of the complications. Notable differences were
observed in neighboring houses according to the hygienic conditions of the various
households.
Healthy carriers and convalescents.—Leichtenstern, who apparently accepted the
Pfeiffer bacillus as the cause of influenza, did not believe that the disease could be
transmitted by healthy carriers. He based this assumption on the statement, made by
Pfeiffer, that the influenza bacillus was only found in acute influenza cases. In the past
few years it has been abundantly shown, however, that the influenza bacillus can and
does exist on the mucous membranes of healthy individuals.
The outbreak in an orphan asylum in New Haven has been previously described.
There the probable source of the sharp outbreak of December 27th seemed to be the
sister who, on convalescence, resumed her duties in the kitchen. There she inspected
and handled the milk served to the children. This suggests the possibility of infection
being propagated by convalescents and by food.
At present we do not know whether or not a patient remains infectious after the acute
symptoms have subsided; we are ignorant as to whether a convalescent patient can
transmit the disease; and we are not certain whether the organism found in healthy
carriers is virulent or not. The information at hand strongly indicates that apparently
healthy individuals may transmit the infection, but the wide distribution of the disease,
with multiple possible sources of infection for each individual, and the relative
insusceptibility of experimentally exposed individuals has made it impossible so far to
answer these questions satisfactorily.
General Manner of Spread in Individual Localities.
Having discussed the mode of propagation of influenza among individuals we will
follow the disease as it attacks one person after another in a community and study the
epidemiologic picture, drawn no longer with the individual as a unit, but with the
community as the unit.
We must here distinguish between a primary epidemic, the first wave of a progressing
pandemic, and the secondary type in which may be grouped those large or small
recurrences which light up for a period of one to three or more years after the primary
wave.
Primary type of epidemic.—One of the first important statistical studies on this
subject was that of P. Friedrich who charted the influenza morbidity in Munich between
the months of December, 1889, and February, 1890. Similar observations have been
made by Parsons, Raats, Linroth, and H. Schmid, following the 1889 epidemic.
Between the occurrence of the first known case of influenza and the time of the first
very definite increase in influenza incidence in a community, which interval may be
termed the invasion period, there is as a rule two weeks. During this period, of course,
more and more cases are occurring, but remain usually sufficiently isolated to attract no
public notice. From this point the epidemic develops very rapidly and reaches its peak,
usually within two or at most three weeks. In another two or three weeks the incidence
has fallen away nearly to normal. The epidemic period comprises from four to six weeks,
or, including the invasion period, an entire duration of six to eight weeks. This is the
picture produced in a community by a primary uncomplicated epidemic of influenza.
Greenwood well describes the salient features of a primary epidemic as “first a rapid and
quasi-symmetrical evolution, and second, a frequency closely concentrated around the
maximum.” In other words the duration is short, the rise to a peak rapid, and the
subsequent fall equally rapid. He showed that in the July and August, 1918 epidemic in
Great Britain nearly 80 per cent. of the total incidence in the localities studied was
grouped within three weeks time. His curve corresponds so well with that of the Munich
epidemic that he is able to superimpose them (Chart I). The rapid rise to a peak, almost
explosive in character, more characteristic of this disease than of any other, is to be
explained by the high degree of invasiveness of the organism, by the short period of
incubation, by the fact that many of the sick continue at their work, thus spreading the
disease, and by the non-immunity of large masses of people, together with the fact that
the transmission of a respiratory infection is accomplished much more easily than is any
other type of infection.
The author holds that the infrequency of immunity is a most important factor in the
production of this type of outbreak. The mode of transmission of influenza is the same
as that of other respiratory diseases. The infectivity is probably no greater than that of
measles, although that indeed is relatively great. The means of transmission are
presumably the same in each. Were we able to develop an immunity for influenza of as
high degree and permanence as we possess against measles, pandemics of influenza
would disappear. We wish to emphasize that the primary type of curve is a phenomenon
not peculiar to influenza, but that under certain circumstances it may be found in other
infectious diseases, and that it would be found more frequently in the other diseases if
the immunity developed against them was of as short duration as it appears to be
against influenza. If, for example, measles were to break out in a large group of
individuals, none of whom had had the disease, the type of curve would be the same. We
will produce evidence supporting our theory under another subject. Of course, other
factors such as short incubation period and unusual opportunities for spread through
mildly ill individuals play a not unimportant role.
CHART I.
The curves of incidence of influenza in

Munich, and of deaths in London during
the 1889 and subsequent epidemics.
(Greenwood.)
Secondary type of epidemic.—There is a decided difference

between the curve of a primary wave as it appears in the onward rush
of a new pandemic and that of a secondary wave occurring at a
greater or less interval following the primary spread. A secondary
epidemic affects, according to Greenwood, a relatively small
proportion of the population, is slower in reaching its maximum, and
thereafter declines slowly and irregularly, more slowly than it
increases. The distribution of the curve is less symmetrical and there
is less concentration around the maximum. A secondary epidemic
may be characterized by a much higher fatality than a primary one.
We believe that the configuration of a secondary type of wave is
due chiefly although not entirely to a certain degree of residual
immunity in a large number of individuals remaining from the first
spread. There is a striking similarity between Chart I and Chart
XXVIII, the latter showing the measles incidence in epidemics
among rural or chiefly non-immune troops in the United States
army. Chart XXIX shows a similar epidemic among urban or chiefly
immune individuals. Here the curves correspond more to those of a
secondary type of influenza epidemic. Thus we see that, in the
absence of immunity, other infectious diseases may produce the
primary type of curve, and that this curve is not a feature of influenza
alone.
A striking difference between the two types of waves of influenza is
the uniformity and relative constancy of the primary type as
contrasted to the great variation in the secondary type. The story of
the first spread of influenza in one community is usually similar to
that of its spread in any other community. Certain exceptions will be
alluded to later. But in the case of recurrent epidemics we may find
them more severe or much milder; we may find that they attack a
large number of individuals or a very few; we may even find an entire
absence of recurrent epidemics in certain communities. The primary
curves are relatively uniform; the secondary curves are variable.
Between 1889 and 1894 in England there were four epidemics. The
first was primary, symmetrical, and lasted between December and
February, 1889–90. The second was asymmetrical and much more
fatal in the localities studied by Greenwood. It occurred in the spring
and summer of 1891. There was a third epidemic in the autumn and
winter of 1891–92 and a fourth occurred from November, 1893 to
January, 1894. The third epidemic, according to Greenwood, showed
some tendency to revert to the primary type in respect to symmetry,
while the fatality rate partook of the character of a secondary
epidemic.
Creighton writes: “That which chiefly distinguishes the influenza
of the end of the nineteenth century from all other invasions of the
disease is the revival of the epidemic in three successive seasons, the
first recurrence having been more fatal than the original outbreak,
and the second recurrence more fatal (in London at least) than the
first. The closest scrutiny of the old records, including the series of
weekly bills of mortality issued by the parish clerks of London for
nearly two hundred years, discovers no such recurrences of influenza
on the great scale in successive seasons.”
Greenwood, who has studied this subject in great detail in
England, discusses Creighton’s remarks as follows: “He would be a
bold man who challenged the accuracy of Creighton upon a point of
historical scholarship, and I have only to suggest that there are faint
indications of increased mortality in years following primary
epidemics of influenza prior to the nineteenth century. Thus 1675
was a year of primary epidemic influenza, fully described in
Sydenham’s Observationes Medicae.
“The nature of the succeeding constitutions is not clear, but the
deaths ‘within the bills’ for 1676 were considerably more numerous
than in 1675, although smallpox, fever and ‘griping of the guts’ were
noticeably less fatal.
“In the English Responsoria (1, 54) the epidemic constitution of
1679 is described as a recurrence of that of 1675—that is, as having
the features of primary epidemic influenza. In the five following
years intermittents prevailed, and in one (1684) the mortality much
exceeded that of 1679, although the deaths from smallpox were
fewer. Again, a hundred years later, in 1782, there was a famous
summer epidemic of influenza in London which gave rise to much
discussion. The London mortalities in 1782 and 1783 were, however,
almost equal, when the smallpox deaths (which were nearly three
times as numerous in 1783 as in 1782) are subtracted from the total
mortality of each year.
“Whether these vague indications are sufficient to permit of our
thinking that the epidemic constitution of 1889–94 was not entirely
unprecedented is disputable. But the contrast of the latter period
with the preceding single epidemic of 1847–48 is striking; that was a
primary epidemic without important sequelae.
“We have now to consider whether our experience this year is
concordant with that of the early nineties, a reversion to the earlier
type, or a new phenomenon.”
After comparing the 1889 curves with those for the July, 1918,
outbreak in England, Greenwood concludes: “I believe that the
evidence just presented establishes a substantial identity between the
summer outbreak of 1918 and the primary wave of 1889–90. We do
not need to appeal to any new factor arising out of the war to account
for it.
“I next consider the secondary epidemic which we are now
experiencing (October, 1918). Evidently our knowledge of the events
in 1891 would lead us to feel no surprise at the emergence of a
secondary wave, although we could not be sure that the precedent of
1847 would not be followed.
“The summer epidemic of 1918 in the Royal Air Force included
nearly 80 per cent. of the total incidence within the three weeks
containing the maximum, and the Munich epidemic included just
over 80 per cent. within the same limits. Now if the current epidemic
has reached its maximum, not more than 65 per cent. of the
incidence will probably be so concentrated, and the duration will
therefore be longer than in the summer; if, as suggested by the ratio
of the last two ordinates, the maximum is not yet attained, then the
quota of the three first weeks is likely to be still smaller and the
complete duration still longer.
“The diagram of factory sickness leads to the same inference,
which is that, from the standpoint of prevalence, the present is a
typical secondary epidemic, congruent with that of 1891.
“It appears, then, that the origin of the summer epidemic must be
explained upon such epidemiological principles as will account for
the primary wave of 1889–90, that the current outbreak is in pari
materia with that of 1891, its excessive mortality being mainly due to
the accident of season, aided by the special circumstances of
overcrowding and fuel shortage which are due to the war. In a word,
this is not essentially a war epidemic.”
Wutzdorff found that in some towns, particularly in North
Germany, the 1891–1892 wave was almost as extensive as that of
1889–90 had been in other places, but that in general the morbidity
in Germany was much lower. He bases these conclusions on a study
of the extent of crowding in the hospitals in the two years, on
statistics of government physicians, etc.
In Europe the recurrent epidemics of 1891 increased as a rule very
gradually, developed slowly, reached their high point frequently after
many weeks, and as gradually decreased. The epidemic duration in
the winter of 1891–92 lasted four or five months. The morbidity in
spite of the longer duration was decidedly less. This is very different
from the explosive appearance of 1889 when the peak was reached in
fourteen days and the whole epidemic had been completed in six to
eight weeks. There were some exceptions to this rule, as in Yorkshire,
England, where the epidemic broke out suddenly between the 11th
and 13th of April, 1891, had reached its peak after ten days, and for
another twenty days declined. Especially interesting was Sheffield,
where the first spread began gradually and ran a slow course, while
the second epidemic of 1891 began explosively, lasted a short time
and declined rapidly, but showed a significantly greater mortality
than that of 1889.
The experiences in various communities in the United States have
been not unlike those described for European cities. Abbott in
describing the successive epidemics in Massachusetts remarked that
the 1889–90 spread manifested itself by a sudden rise in the
mortality from influenza and pneumonia, beginning about December
20th and culminating in the middle week of January, thereafter
falling off quite suddenly in February to about the usual rate for
these diseases. The second epidemic two years later began with a
more gradual rise in October and November and then increased
sharply in December, continued for nearly three weeks at its
maximum in January, and declined nearly as sharply as in the
previous epidemic two years before.
Winslow and Rogers who have studied the 1918 epidemic as it
affected the various towns of Connecticut observed that the outbreak
in a given community generally occupied a period of from six to eight
weeks, and was steep and abrupt in communities which were badly
hit, flatter and more gently sloping in those which escaped lightly.
Also the outbreak was more severe in communities receiving the
infection early than in those later affected.
Mortality curves.—Pearl has studied the epidemic constitution of
influenza in forty-two of the large cities of the United States. He has
plotted the annual death rate per 1,000 population from all causes in
each week, from the week ended July 6, 1918, up to January 1, 1919,
and observed a very distinct difference in the type of curve for deaths
from all causes during the epidemic period in the various cities.
These differences have been chiefly in respect to the severity and
suddenness with which they were attacked. Thus Albany, Boston,
Baltimore, Dayton and Philadelphia show an initial explosive
outbreak of great force, while Atlanta, Indianapolis, Grand Rapids,
Milwaukee and Minneapolis exhibit a much slower and milder
increase of the mortality rate. In Albany and Baltimore the curve of
the first epidemic outbreak rises to a peak and declines at about the
same rate. In Cleveland and St. Paul, on the other hand, the rate of
ascent to the peak is very rapid, while the decline is slow and long
drawn out.
Some of the cities, such as Albany, show but a single well defined
peak in the mortality curve. Others, such as Boston, New Orleans
and San Francisco show two peaks; while still others, like Louisville,
show three well marked peaks.
Usually the first was the highest and the second and third were
progressively lower. Milwaukee and St. Louis, on the other hand,
showed second peaks higher than the first. The usual phenomenon,
however, was a large first wave followed by smaller ones.
The highest, or maximum peak rate of mortality during the
epidemic varied greatly, from 31.6 per 1,000 in the case of Grand
Rapids, to 158.3 per 1,000 in the case of Philadelphia.
The death rates which were of the most frequent occurrence were,
generally speaking, rates below 70 per 1,000 per week.
The date of the week in which the maximum peak rate occurred
was earliest in Boston and Cambridge, where it occurred October
5th, and latest in Grand Rapids, Milwaukee and St. Louis (December
14th). Thirty-one of the 40 cities studied had attained the peak rate
of mortality prior to November 2d. In the case of Milwaukee and St.
Louis the maximum peak was the second peak, whereas in Grand
Rapids it was the first peak that was so late. Sixty-five per cent. of the
40 cities showed two distinct peaks in the mortality curve, while 15
per cent. had one peak, and 8 or 20 per cent. had three peaks.
“It appears clearly that there was a definite tendency for the two-
peak cities to fall into two groups in respect of the time elapsing
between first and second peaks. About a third of them had the
second mortality peak around eight weeks after the first peak. The
remaining two-thirds had the second peak, on the average, about
thirteen weeks after the first. The three-peak curves had the second
peak on an average 7.1 ± 0.3 weeks after the first, and the third peak
on an average 13.1 ± 0.3 weeks after the second. The cycle in the
epidemic waves would therefore appear to be nearly a multiple of
seven weeks rather than the ten weeks tentatively deduced from the
dates of peaks. There the process of averaging obscured the true
relations.”
Duration of explosive outbreak.—The range of the duration of the
first outbreak of epidemic mortality is great, varying from five weeks
in Richmond, Virginia, to twenty-three weeks in Atlanta, Georgia.
Twenty of the cities, one-half the total number, showed a duration of
ten weeks or less, while in the other half the duration was eleven
weeks or more. The mean duration of epidemic mortality in the first
outbreak was 11.90 ± 0.55 weeks. The ascending limb of mortality
rate was rapid in nearly all cities. The descending limb was usually
slower. In 34 of the 40 cities it required four weeks or less time for
the mortality rate to pass from normal to its epidemic peak. But in
only half as many (17) of the cities did the rate come down from its
peak to normal again in a period of four weeks or less. The mean
time from normal mortality rate to peak was 3.90 ± 0.21 weeks. The
mean time from peak mortality rate to normal was 8.00 ± 0.50
weeks. Thus it took about twice as many weeks for the mortality
curve to come back from its peak to normal, as were required for the
increase from normal to peak at the beginning of the explosion. This
is on the average. The ascending limb occupied about a month and
the descending limb two months.
Pearl’s curves which have been copied in this report (Charts II to
VII) enable us to follow his conclusions. Pearl offers a partial
explanation for the variations in the different cities. There can be no
doubt but what many factors play a role in the causation of these
variations, and it is to be regretted that up to the present no statistics
for smaller, more homogeneous communities have as yet been
reported which could be compared with Pearl’s excellent work on the
large cities of the country. Were his work supplemented by records
from smaller towns in which the varying factors are less numerous,
in which there is less occupational variation, additional conclusions
could probably be reached. The unfortunate feature is that as a rule
statistics from the smaller cities and towns are less reliable.
From a detailed mathematical study of influenza in 39 of our
largest cities, done chiefly by the means of multiple correlation, with
the hope of being able to explain the differences in the epidemic
curves of weekly mortality in the various cities, Pearl concludes as
follows:
“The general conclusion to which we come from an examination of
the correlation data assembled to this point is that these four general
demographic factors, density of population, geographical position,
age distribution of population, and rate of recent growth in
population, have practically nothing to do, either severally or
collectively, with bringing about those differences between the
several cities in respect to explosiveness of the outbreak of epidemic
mortality in which we are interested. Significantly causal or
differentiating factors must be sought elsewhere.”
CHART II.
Death rates from all causes by weeks in

certain large cities of the United States
during the winter of 1918–19. (Pearl.)
CHART III.

CHART IV.


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1. Match each statement with the correct term below.

1. Passive Any asset that is not a receivable, inventory, or

2. Match each statement with the correct term below.

1. NOL Owns at least a 10% interest and is significantly

A. Only statement I is correct.

A. Only statement I is correct.

A. Only statement I is correct.

A. Only statement I is correct.

A. Only statement I is correct.

A. Only statement I is correct.

I. Not have an adjusted gross income in excess of $100,000.

A. Only statement I is correct.

34. A passive activity

I. includes an interest in a limited partnership held by a limited partner investor.

A. Only statement I is correct.

35. A passive activity

A. Only statement I is correct.

36. Which of the following must be classified as "portfolio income?"

I. Dividend income from an investment in Lincoln Corp. common stock.

A. Only statement I is correct.

I. Interest income on CDs from First National Bank.

A. Only statement I is correct.

38. A taxpayer had the following for the current year:

Active Portfolio Passive

A. Only statement I is correct.

39. If a taxpayer has the following for the current year:

Active Portfolio Passive

A. Only statement I is correct.

I. Salvador will report an ordinary loss of $18,000.

A. Only statement I is correct.

A. Only statement I is correct.

What is Bowden's adjusted gross income for this year?

Net business income $45,500

What is Karl's adjusted gross income for this year?

What is the amount of suspended loss allocated to Activity 2?

Passive Activity A $25,000

Passive Activity A $ (4,500)

I. Darien will report an ordinary loss of $6,000.

A. Only statement I is correct.

A. Only statement I is correct.

A. Only statement I is correct.

A. Only statement I is correct.

What is Mary and Philip's adjusted gross income?

What is Judy and Larry's adjusted gross income?

A. Only statement I is correct.

A. Only statement I is correct.

I. Anna will report an ordinary loss of $7,000.

A. Only statement I is correct.

64. Which of the following events is a "casualty" loss?

A. Only statement I is correct.

65. Which of the following events is a "casualty" loss?

I. Diamonds stolen by thief, reported to police

A. Only statement I is correct.

71. Which of the following losses are generally deductible?