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Chapter 7—Losses: Deductions and Limitations
MATCHING
Match each statement with the correct term below.

a. Limited to $3,000 annually for individuals.
b. When an asset is disposed of for less than its basis.
c. An excess of business deductions over business income.
d. A trade or business in which the taxpayer is not a material participant.
e. A loss that results from some sudden, unexpected, or unusual event.
f. Any asset that is not a receivable, inventory, or depreciable or real property used in a trade
or business.
1. Capital asset
2. Capital loss
3. Casualty loss
4. Net operating loss
5. Passive activity
6. Transaction loss
1. ANS: F PTS: 1 DIF: Easy

NAT: AICPA Measurement | AACSB Analytic
2. ANS: A PTS: 1 DIF: Easy
3. ANS: E PTS: 1 DIF: Easy
4. ANS: C PTS: 1 DIF: Easy
5. ANS: D PTS: 1 DIF: Easy
6. ANS: B PTS: 1 DIF: Easy
Match each statement with the correct term below.

a. A loss that is generally not deductible.
b. The borrower is personally liable for the debt.
c. The loss is used to offset income in future periods.
d. A liability that is only secured by the underlying property.
e. The loss may be used to offset income from prior periods.
f. A type of stock that receives some ordinary loss treatment.
g. Involved in a rental activity for more than 500 hours in a year.
h. Cash or other assets contributed plus recourse debts of the activity.
i. Owns at least a 10% interest and is significantly involved in the rental activity.
j. The amount of the loss for fully destroyed property is the property's adjusted basis.
k. The amount of loss is limited to the lower of the property's adjusted basis, or the reduction
in fair market value.
l. Management is left to at least one general partner whose liability is not limited and who is
responsible for the on-going activities of the business.
7. Active participant
8. At-risk amount
9. Business casualty loss
10. Limited partnership
11. Material participant
12. NOL carryback
13. NOL carryforward
14. Nonrecourse debt
15. Personal casualty loss
16. Personal-use loss
17. Recourse debt
18. Small business stock
7. ANS: I PTS: 1 DIF: Easy

8. ANS: H PTS: 1 DIF: Easy
9. ANS: J PTS: 1 DIF: Easy
10. ANS: L PTS: 1 DIF: Easy
11. ANS: G PTS: 1 DIF: Easy
12. ANS: E PTS: 1 DIF: Easy
13. ANS: C PTS: 1 DIF: Easy
14. ANS: D PTS: 1 DIF: Easy
15. ANS: K PTS: 1 DIF: Easy
16. ANS: A PTS: 1 DIF: Easy
17. ANS: B PTS: 1 DIF: Easy
18. ANS: F PTS: 1 DIF: Easy
TRUE/FALSE
1. An operating loss occurs when an entity's deductions exceeds the income generated for the period.
ANS: T PTS: 1 DIF: Easy OBJ: 1

2. A transaction loss occurs when an asset is disposed of at less than its basis.

3. A corporation has a net capital loss. The significance of a net capital loss in 2013 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.
ANS: T PTS: 1 DIF: Easy OBJ: 2 | 10
4. The term tax shelter refers to investment property that involves residential and commercial real estate.
ANS: F PTS: 1 DIF: Easy OBJ: 3

5. 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.
ANS: F PTS: 1 DIF: Medium OBJ: 4

6. 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.

7. 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.
ANS: F PTS: 1 DIF: Easy OBJ: 6

8. While most rental activities are classified as passive, an exception is low-income housing.
ANS: T PTS: 1 DIF: Medium OBJ: 7

9. Portfolio income consists of unearned income from dividends, interest, royalties, annuities, and other
assets held as investments.

10. A closely held corporation cannot offset net passive losses against income of the business.
ANS: F PTS: 1 DIF: Medium OBJ: 6 | 7

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

MULTIPLE CHOICE
1. 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.
ANS: B PTS: 1 DIF: Medium OBJ: 1
2. 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.

ANS: C PTS: 1 DIF: Medium OBJ: 1
3. 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.

4. 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.

ANS: D PTS: 1 DIF: Medium OBJ: 1
5. Baker Corporation suffers a net operating loss (NOL) of $65,000 in 2013. Baker was incorporated in
2011. Baker had a NOL of $20,000 in 2011 and taxable income of $35,000 in 2012. The corporation
expects a taxable income of $200,000 in 2014. What valid alternatives are available to Baker
concerning the $50,000 loss?
I. Baker can carryback the loss to 2014 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.

ANS: C PTS: 1 DIF: Difficult OBJ: 2
NAT: AICPA Critical thinking | AACSB Analytic
6. 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
7. 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.

ANS: B PTS: 1 DIF: Difficult OBJ: 5 | 6
8. 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.

9. 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.
10. 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.
ANS: A PTS: 1 DIF: Difficult OBJ: 5 |7
11. 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
ANS: C PTS: 1 DIF: Medium OBJ: 5 |6
12. During 2013, 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
ANS: D PTS: 1 DIF: Difficult OBJ: 5 | 7
13. 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
ANS: E PTS: 1 DIF: Medium OBJ: 5 | 7
14. 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 than 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.
15. 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
ANS: C PTS: 1 DIF: Difficult OBJ: 5 | 7
16. 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
17. 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.

ANS: A PTS: 1 DIF: Medium OBJ: 5 | 6
18. A passive activity

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.

19. 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.

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

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.

21. 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.

22. If a taxpayer has 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 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.

23. 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.

24. 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.

25. 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
26. 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
27. 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.
ANS: A PTS: 1 DIF: Medium OBJ: 7
28. 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
29. Karl has the following income (loss) during the current year:
Net business income $45,500
Actively managed rental property (34,000)
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
30. 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
31. 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
ANS: B PTS: 1 DIF: Difficult OBJ: 6
32. 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
33. Ling owns 3 passive investments. During the last two years, she has the following income and loss
from each activity:
2012 2013
Activity 1 $(14,000) $(6,000)
Activity 2 (6,000) (1,000)
Activity 3 8,000 12,000
At the end of 2013 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
34. 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
35. Linda owns three passive activities that had the following results for the current year:
Passive Activity A $ (4,500)
Passive Activity B 20,000
Passive Activity C (25,500)
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
36. During the current year, Diane disposes of Fine Foods Limited Partnership, at a gain of $12,000.
Diane's adjusted gross income from non-passive 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
37. 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.

ANS: A PTS: 1 DIF: Difficult OBJ: 5 | 6
38. "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.

39. "Active participation" and "real estate professional" are both exceptions to the general rule for passive
activity losses with rental real estate.
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.

40. 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.
41. Rose has an adjusted gross income of $130,000. Not included in her adjusted gross income is a
$15,000 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 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.

ANS: A PTS: 1 DIF: Difficult OBJ: 6 | 7
42. 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
43. 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
44. 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.

45. 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.

46. 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.

ANS: D PTS: 1 DIF: Medium OBJ: 6 | 7
47. Which of the following events is a "casualty" loss?

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

48. Which of the following events is a "casualty" loss?
I. Diamonds stolen by thief, reported to police
II. Florida orange trees killed by a freeze.

49. 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
50. 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
ANS: A PTS: 1 DIF: Difficult OBJ: 9
51. Jennifer's business storage shed is damaged by a hail 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
52. 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
53. 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
ANS: D PTS: 1 DIF: Difficult OBJ: 9
54. 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.

ANS: C PTS: 1 DIF: Easy OBJ: 8 | 10
55. Which of the following losses are generally deductible?

I. Loss on the sale of a personal residence.
II. Loss due to the theft of business inventory.

ANS: B PTS: 1 DIF: Easy OBJ: 9
56. 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.
57. 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)
58. 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
59. 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
60. Billingsworth Corporation has the following net capital gains and losses for 2009 through 2012.
Billingsworth' marginal tax rate is 34% for all years.
2009 2010 2011 2012

$8,000 $3,000 $6,500 $(9,000)
In 2013, Billingsworth Corporation earned net operating income of $30,000. What is/are the tax
effect(s) of the $9,000 net capital loss in 2012?
I. Corporate taxable income is $21,000.
II. The net capital loss will provide income tax refunds totaling $3,060.

61. 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
62. 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
63. 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
64. 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.

65. 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.

66. 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.

67. 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
68. 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
69. 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
b. No gain or loss $6,000 gain
c. No gain or loss $3,000 gain
d. $3,000 gain $6,000 gain
e. No gain or loss No gain or loss
70. 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
71. 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, 2013, for $2,500.
On January 23, 2014, he purchases 600 shares of Vanity Corporation common stock. What is the
amount of Hamlet's recognized loss in 2013?
a. $ - 0 -
b. $ 600
c. $ 900
d. $1,500
e. $4,000
72. The wash sale provisions apply to which of the following?

I. Tom realizes an $8,000 loss on the June 17, 2013, sale of 650 shares of Roadrunner
Corporation common stock. He replaces the 650 shares with Hawke Inc., stock on July 8,
2013.
II. Rosie realizes a $6,000 loss on the December 29, 2013, 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,
2014. The Redeemer bonds have the same interest rate, maturity date, but a different
bond rating (AAA) as the Billings bonds.

73. The wash sale provisions apply to which of the following?

I. Jim bought 500 additional shares of Alfa Gamma stock for $4,000 on December 2, 2013.
Jim owned 2,500 shares after that purchase. On December 26, 2013, 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, 2013, 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, 2014. The Jackson bonds have a different interest rate and maturity date then the
Sloan bonds but have the same bond rating (AAA).

74. 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
ANS: E PTS: 1 DIF: Medium OBJ: 11
75. 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.
ANS: D PTS: 1 DIF: Medium OBJ: 10 | 11
76. Willie sells the following assets and realizes the following gains (losses) during the current year:
Personal auto $(5,000)
Municipal bonds (7,000)
Stamp collection 4,000
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.
77. 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.
ANS: C PTS: 1 DIF: Medium OBJ: 10 | 11
78. 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
79. 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
ANS: A PTS: 1 DIF: Difficult OBJ: 9
80. 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.
ANS: E PTS: 1 DIF: Difficult OBJ: 9
SHORT ANSWER
1. If a corporation incurs a net operating loss, what would cause it to elect to carry the loss forward and
forsake the carryback? Explain.
ANS:
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.
PTS: 1 DIF: Medium OBJ: 2

2. Tyrone is the president of JWH Manufacturing and owns 30% of its stock. JWH is organized as an S
corporation. During 2013, JWH has a loss of $240,000. At the beginning of 2013, Tyrone's amount
at-risk in JWH is $60,000.
a. What is Tyrone' deductible loss in 2013? What is Tyrone's at-risk amount at the end of 2013?
b. In 2014, JWH has a taxable income of $100,000. What is the effect on Tyrone's 2014 income?
What is Tyrone's at-risk amount at the end of 2014?
ANS:
a. As an S corporation, the income and losses are passed through to its shareholders for taxation.
In 2013, 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 2013 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 2014 gross
income. This increases his amount at-risk by $30,000 and he is allowed to deduct the $12,000
loss from 2014 suspended due to the at-risk rules. By deducting the loss, Tyrone's at risk
amount at the end of 2014 is $18,000 ($30,000 - $12,000).
PTS: 1 DIF: Difficult OBJ: 2 | 4

NAT: AICPA Critical thinking | AACSB Analytic
3. Why did Congress enact the at-risk rules?
ANS:
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.

4. 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?
ANS:
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).
PTS: 1 DIF: Difficult OBJ: 4
NAT: AICPA Critical thinking | AICPA Measurement | AACSB Analytic
5. Discuss the difference(s) between the real estate professional exception and the active participation
exception when dealing with rental properties.
ANS:
(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 bona fide 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.

6. 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.
ANS:
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.
PTS: 1 DIF: Medium OBJ: 6 | 7

7. 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?
ANS:
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

8. 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.
ANS:
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.
PTS: 1 DIF: Difficult OBJ: 5 | 6 | 7

9. 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)
Passive Activity 1 $(36,000)
Passive Activity 2 22,000
Passive Activity 3 (4,000)
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.
ANS:
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.
PTS: 1 DIF: Difficult OBJ: 5 | 6 | 7

10. 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?
ANS:
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 either 15% or 20%. As a result, $17,000 of his
$94,000 taxable income is taxed at 15% or 20%.
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.

11. 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.
ANS:
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.
PTS: 1 DIF: Difficult OBJ: 5 | 6 | 7 | 8 | 11

12. 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.
ANS:
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.
PTS: 1 DIF: Difficult OBJ: 9

13. 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?
ANS:
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.

14. The Corinth Corporation is incorporated in 2010 and had no capital asset transactions during the year.
From 2010 through 2013, the company had the following capital gains and losses:
2010 2011 2012 2013
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?
ANS:
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. The carryforward’s reduce the tax paid in future periods on net capital gains. For Corinth:
2010 2011 2012 2013
Net gain (loss) $11,000 $(4,000) $(6,000) $(10,000)
The 2011 loss is carried back to 2010 and a $1,360 ($4,000  34%) refund is obtained. The 2012 loss
is also carried back to 2010 and results in a $2,040 ($6,000  34%) refund. In 2013, $1,000 of the
$10,000 loss is carried back to 2010 resulting in a $340 ($1,000  34%) refund. The remaining $9,000
($10,000 - $1,000) net capital loss from 2013 is carried forward to 2014 and may be used to reduce
capital gains for a maximum of five years.

15. 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?
ANS:
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.

16. 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.
ANS:
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 realized $ 4,000
Less: Basis [($9,000  750 = $12)  500 shares] (6,000)
Realized loss $(2,000)
Disallowed loss on 200 shares [(200  500)  $2,000] 800
Allowable loss on 300 shares not replaced $(1,200)
The basis of the 200 shares purchased on June 26 is $3,000 ($2,200 cost + $800 disallowed loss on
wash sale).

17. 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?
ANS:
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.

18. 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.
ANS:
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.
PTS: 1 DIF: Medium OBJ: 9 | 11

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Reluctantly I realized I was taming down, through sorrow, not
discipline. My childhood pastime of painting took a more serious
turn. I even attempted to write imaginary stories about animals.
Mother was so pleased with my efforts she sent one of these stories
to Aunt Irene saying, “See what our little Nastia has done.” I now
took a greater interest in music and hoped that by working hard I
might sing as well as Mother or play like Olga. I loved Olga for her
true kinship and often kissed her hand for her understanding of us
younger sisters.
A week or two was a long time for me to stick to anything. Again and
again I would revert to my childhood spirit but each time with less of
my former zest. My reputation of being a problem child persisted.
People often asked, “Where does the little one, small in size, store
so much, much energy? She has an endless supply of jokes and
pranks.” Some enjoyed my humor as I could tell from the expression
on their faces, and some did not.
Marie and I had all kinds of “properties” with which to carry out our
practical jokes. We had a set of stuffed animals which we called our
“Circus Kingdom.” We had a mechanical mouse, a yellow iridescent
snake with a moving head and a red, sharp tongue, a snapping turtle
which might tangle in a victim’s dress. Frightened, our victim would
jump up on a sofa or chair while Marie and I pretended to be equally
scared and put on an act with wide-open mouths.
Often, new attendants were warned to watch out for me and my
pranks, but in the end they suffered. In all these activities I was the
leader and most of the time in disgrace. Once Alexei sprinkled water
over me saying, “You must have been born in a dry summer, your
jokes have outgrown you.”
Perhaps my most effective toy for playing pranks was a large doll
with brown phosphorescent eyes that shone in the dark. This
mechanical doll, when wound, would open and close its eyes,
making life-like, blinking motions. On one occasion, I wound my doll
while Marie was watching at the bedroom door and, when we heard
our victim coming, I left the doll on the floor facing the door. We then
jumped into our beds and pretended we were asleep. The attendant,
who had come to see if we were all right, saw this awful thing on the
floor in the dark with its blinking eyes. Terrified she ran screaming
into the hall and awakened everyone on the whole floor. After this a
sign was put up on our playroom door which read, “Enter only by
permission of Olga and Tatiana.” This was designed to prevent
Marie, Alexei, and myself from entering the room at will.
In the face of recent family heartaches I was less and less proud of
my reputation as a prankster.
VI
JUBILEE: 1913
The spring of 1913 marked the three hundredth anniversary of the
Romanov dynasty. Celebrations began with a great jubilee in St.
Petersburg. We arrived from Tsarskoe Selo a few days ahead of the
festivities and took up our residence in the Winter Palace. On the
first day we drove in open carriages through streets lined with troops
to the Cathedral of Our Lady of Kazan where a picturesque
ceremony was held. It was a gray, cold and rainy day, in contrast to
the brilliance that awaited us inside the Cathedral.
According to custom the Tsar entered first, followed by the Heir to
the Crown. When Alexei appeared, it was not a strapping, healthy
Tsarevich to whom all the Grand Dukes and dignitaries bowed, but a
frail little boy of nine, carried in the arms of a Cossack. This was a
sad moment for us. We had hoped Alexei would at least be well
enough to walk but he had not recovered sufficiently from his recent
illness. We stood under a canopy in the middle of the great church.
Alexei sat in a chair. Mother worried about Alexei. She asked us to
watch him also. Dr. Derevenko stood nearby. We sisters were
dressed in white, as was Mother. She wore the blue ribbon of St.
Andrew, the order studded with diamonds and rubies. We had the
red ribbon of the order of St. Catherine with its dazzling star.
Grandmother Marie stood with us, trim and regal as always, blazing
with diamonds, rubies and emeralds. The elite of St. Petersburg
were assembled here, a magnificent sight, with the high clergy in
golden robes and elaborate mitres, and the high military dignitaries
in uniforms embroidered in gold.
During the service a dove flew into the Cathedral and circled above
our canopy. Afterwards friends told us they were afraid it would fly
into the lighted candles and start a fire, but fortunately it flew out of
the church through a door. Since the dove is an important symbol of
peace in our religion, a representation of the Holy Ghost, we all
wondered if this event had a special significance. (It is worthwhile
mentioning that also during the coronation, Father said, “A pigeon
flew during the ceremonies.” Later, in Ekaterinburg on the day of
tragedy, while we were having our last walk in the yard, a pigeon
flew over us three times and then dashed repeatedly against the
window.) After the ceremony, in the afternoon, we were attired in
national costumes, as were our guests. Mother was especially
beautiful, in her high kokoshnik, with her white robe exquisitely
embroidered in silver and long veil. In the evening she wore a tiara of
Catherine II and a necklace of diamonds. It was valued at several
million rubles. It was so heavy that she used it in all only a few times.
Olga and Tatiana were attired in soft pink tulle gowns, Marie and I in
white silk and lace.
Some evenings later a ball was held in the Winter Palace. It was the
first official appearance for us two younger sisters, the first time we
participated in such a grand affair. I remember how excitedly we
looked forward to that occasion. Mother was indisposed that evening
and, after a short while, suggested that we leave early and go to our
rooms. Grandmother, however, took our side and asked Mother to let
us stay longer, and promised that she would personally look after us.
Mother burst into tears and said: “These women of St. Petersburg
might talk about the girls, and Anastasia’s jokes might be
misinterpreted.”
I was very unhappy that evening for fear that every move I might
make or every word I might speak would be used against me. All the
innocent joy was taken from me that gala night for fear of those
women’s sharp tongues.
From St. Petersburg we proceeded by train to Moscow where the
Jubilee continued. On this occasion Mother wore the crown jewels.
She never cared for them after the unfortunate incident which
occurred during her early married life. At that time Granny felt that
she still was entitled to wear the crown jewels instead of the young
Empress. In the underground vaults in the Winter Palace there was a
section where Mother kept some of her personal jewels. Any time
she wished to have them, she notified the court chamberlain, Count
Benckendorff, who sent several responsible persons with papers to
fetch the desired pieces which were then brought under guard to
Mother.
After the anniversary festivities we never spent another night at the
Winter Palace, our childhood home. But during the war my sisters
often stopped in the rooms for a glass of tea, after various charitable
meetings. It is sad to think what became of the treasures stored in
those vaults and elsewhere for generations, belonging not only to the
Imperial family but to the Russian people as well. These treasures,
worth billions of rubles, were held until the leaders of the revolution,
Lenin, Trotsky (Bronstein), Apfelbaum, Rosenfeld and others got
their clutches upon them. It was rumored that much of it was divided
among their relatives who came to our country for that purpose and
to kill and loot. These people and their successors have been
exporting our Russian national treasures, so long guarded by the
Imperial family, and selling them to foreign countries.
From Moscow we went to Vladimir, then to Nizhni Novgorod and to
Yaroslavl. The latter—an old historic city with a view of the wide river
—was a charming sight. I cannot even begin to describe the
enthusiastic reception. Throngs of children, cadets, the nobility and
the townspeople lined the streets right down to the dock. What a rich
sight from the river—this beautiful city on a little hill! The bells were
still ringing until we could no longer hear them. We passed an
expanse of meadows, shimmering fields, and the breeze was
sweeping like a soft veil over that heavenly country.
In every city there were similar festivities, and dinners with many
guests who had been especially selected to honor my Father and my
Mother. Father’s guests at dinner were mostly men, and Mother
entertained ladies in separate drawing rooms. The famous
Plevitskaya sang again and bowed gracefully before the appreciative
audience. There were many outstanding entertainments at which we
made many new friends.
We were so tired at the end of our trip that Tatiana, in this mood,
said: “People and more people—I am tired of them!” Mother,
overhearing her say this, reprimanded her.
On our way to Kostroma we sailed on the Volga. People lined the
shores, some even wading into the water up to their waists. When
our boat developed some trouble and while the repairs were being
made, the people thronged the shores and sang “God Save the
Tsar.” The Imperial party was delayed in reaching Kostroma. It was
in this terraced city overlooking the Volga River that the Romanov
dynasty had its official beginning, and now a special ceremony was
to be held to celebrate the three hundredth anniversary of the
Romanov reign.
At last we reached the city and proceeded to the monument of
Susanin. This was a column on which rested a bronze bust of the
first Romanov Tsar, Michael Feodorovich. This column was
supported by the peasant, Susanin. The latter was the Russian
patriot who deliberately misled the Polish army which had invaded
Russia and asked Susanin to lead the way to the whereabouts of the
newly elected Tsar, who was in hiding. As a result of Susanin’s false
directions, the Polish army was destroyed and was driven out. The
plot of the famous opera, “A Life for the Tsar” by Glinka, was drawn
from this heroic incident. This opera was one of my Father’s
favorites. From the time of Feodor Romanov, a number of the brides
of the Grand Dukes upon marriage adopted Saint Feodor and took
the name of Feodorovna as a patronymic.
From the monument, the procession continued to the Ipatiev
Monastery, where the first Romanov was sheltered in 1613. In the
monastery courtyard was the beautiful Cathedral of the Holy Trinity
and within it stood the iconostasis and the throne of Tsar Michael
Feodorovich. This monastery had been built by a Tartar prince who
was the founder of the Godunov family and who was the first to be
baptized there.
While in the Cathedral we visited the dark rooms in which Michael
once had lived. We sat on the chairs with the beautifully embroidered
double eagles on their backs, and drank tea from the original
containers at the same table once used by Tsar Alexei. In one of the
rooms was a portrait of Michael and Alexei Romanov. Both looked a
little like my Father. The legend tells us that Alexei was born on St.
Job’s day, and so was my Father. And their experiences were sad,
but those of Alexei were not as tragic as those of my Father.
Also, we went to the cemetery and laid an exquisite wreath made of
silver in the form of the cap of Monomakh and decorated with jewels
on the grave of Michael.
Parenthetically speaking, it was a strange coincidence that, in
Ekaterinburg in 1918, in the Ipatiev House, the last Emperor of
Russia, Nicholas II came to his tragic end. The Romanov dynasty
was born in the Ipatiev Monastery in Kostroma in 1613 and died in
the Ipatiev House in Ekaterinburg, three hundred and five years later.
History tells us that, at the election of Michael Feodorovich
Romanov, a crippled beggar woman who claimed to be a wandering
saint had predicted that the Romanov dynasty was born with Michael
and would die with another Michael. And so it happened. When
Father abdicated, his brother Michael succeeded him to the throne
but soon abdicated.
Another strange incident was that a three hundred year old tree of
immense diameter, said to have been planted by Michael, had been
cut down just before we arrived in Kostroma. We saw it mounted on
huge wooden blocks to be preserved as an object of historical
interest.
One of the members of our party on this trip was Prince Dolgorukov,
a direct descendant of the family that built the city of Kostroma and
also the first church in the Kremlin in Moscow. Prince Dolgorukov,
faithful friend of our family, followed us to Tobolsk and later to
Ekaterinburg where he, too, came to a tragic end.
The year 1913 also marked two hundred years since the seat of
government moved from Moscow to St. Petersburg in 1713.
During this entire trip we received many gifts and pictures, and our
albums were filled with photographs of historic events. On our way
home we stopped at the Nicholas Palace in Moscow. At the functions
there, Mother wore the old Slavonic robe and the crown jewels.
These jewels she never wore again after the Jubilee celebrations
ended. This was a year of many anniversaries and festivities.
Several regiments celebrated their hundredth anniversary. The Naval
Cathedral at Kronstadt was reconsecrated in celebration of its
hundredth anniversary. We attended all these functions.
Soon we were back in Tsarskoe Selo resuming our daily routine.
During this busy year Baroness Iza Buxhoeveden became lady in
waiting, replacing the young Princess Elizabeth (Lili) Obolensky
whose health had become impaired. Lili had taken several trips with
us, including the one to England. We had known Baroness
Buxhoeveden previously. She had already assumed some
responsibilities in the palace. All the ladies in waiting were required
to be single and to come from titled families. Mother did not believe
in all the old court etiquette with its traditions and restrictions. To her
it did not matter whether these young ladies were princesses or
baronesses. She selected them on the basis of the best possible
ability, education and culture. Baroness Buxhoeveden came from a
Baltic family which had produced several ambassadors. Her father
had been an ambassador to Denmark.
The position of lady in waiting was an honorary one to which many
young ladies looked forward. To distinguish their rank from the other
staff, they received badges studded with diamonds, with Mother’s
initial and a crown on its top. Some were in silver and some in gold
according to their length of service. The ladies in waiting were not
permitted to discuss political affairs at any time and all the
happenings were to be kept in strict secrecy. They were not allowed
to enjoy the company of the officers and aides in the palace.
Their duty was to accept telephone calls for Mother and for us girls,
make notations of the calls, note incoming and outgoing telegrams,
filing them by date, and make a memorandum of all telegrams and
letters. They also were to chaperon us on drives or at any other
function. Maids, a footman and a carriage were provided for their
comfort. Extra ladies were called to the palace for the day if needed.
Later during our arrest in Tsarskoe Selo, our letters and telegrams
did not escape from being read. Iza shared our deprivations and
followed us later to Tobolsk, Siberia, but was not permitted entry into
the governor’s house.
PART II
The First World War
VII
EVE OF THE WAR: 1914
Early in the spring of 1914 we went to Livadia. Full days of school
work were continued here. M. Pierre Gilliard and our Russian tutor,
M. Peter Vasilievich Petrov, accompanied us as usual. Sometimes
our tutors were invited to lunch with us and afterwards joined us in
our hikes when the sun was bright and warm, or in some other
recreational pastime. Our hikes took us through the park or along the
shore to Yalta or to the Church of Alexander Nevsky on the opposite
hill. Dinner was the focal point of the day with friends and relatives
as guests. We children, especially, enjoyed Prince Igor
Constantinovich and the Grand Duke Dimitri Pavlovich. Aunt Ella,
Mother’s older sister, the widow of the Grand Duke Serge, brother of
Alexander III, was another cherished guest. She and Mother had
similar religious views, having inherited this mysticism from their
mother, Princess Alice, Grand Duchess of Hesse, daughter of Queen
Victoria of England.
Grandmother Alice, I was told, was a student of religious history and
movements, having been inspired by her tutor, a theologian who was
a close friend of the Hesse family. He also had a direct influence on
Mother. This theologian imbedded into her thoughts the terrible fear
of sin. For years we children watched her struggle, trying to leave
this deeply-buried mysticism and return to reality. However, due to
the thoughtless criticism by my other grandmother, Father’s mother,
Marie Feodorovna, and also the unsympathetic attitude of the
Russian court, she sought comfort in this mysticism and her whole
soul once more overflowed with it. Then with the misfortune of her
son’s illness, she reverted to it all the more. At the same time she
pretended not to notice the criticism and tried to hide her pride; but
her sensitive heart suffered and the words which she should have
spoken hardened in her soul. Courtiers took her for a heartless, cold
and eccentric woman. She, having been raised by her austere
grandmother, tried to carry on in an efficient English manner. Even
though her humble faith grew stronger, her English upbringing never
left her and she never became a true Russian in manners, but in her
heart and soul she was a better Russian than most native-born
Russians.
We boarded our yacht, the “Standard”, which had been brought to
the Crimean waters from the Baltic Sea via the North Sea. We went
on several short cruises on the Black Sea. Once we crossed to
Constantsa on the Rumanian coast to return a visit of King Carol and
Queen Elizabeth (Carmen Sylva) of Rumania. They had come to see
us with their grandnephew, the future King Carol II. It was an
overnight trip to Constantsa. Carmen Sylva at her late age was still
beautiful, as also was Princess Marie (Missy), wife of Prince
Ferdinand; later they became sovereigns of Rumania. During this
visit Princess Marie and my sister Olga developed a close friendship.
The strained relationship between Mother and Missy’s sister Victoria,
who was divorced from Mother’s brother Ernest, was improved; all
was forgotten now. We had luncheon in a pavilion which seemed to
rise right out of the sea. From this vantage point we could see many
yachts and smaller boats cruising back and forth for a closer look at
the “Standard”.
In the afternoon, tea was served on board the “Standard” for the
members of the two families. After tea a great many dignitaries
joined us on board ship.
1906
1913—JUBILEE YEAR
THE GRAND DUCHESS ANASTASIA
COMMUNICATION. DATED
JUNE 14TH, 1901 (OLD
STYLE), FROM THE
EMPEROR NICHOLAS II TO
THE PRESIDENT OF THE
UNITED STATES
ANNOUNCING THE BIRTH
ON JUNE 5TH (OLD STYLE)
OF THE GRAND DUCHESS
ANASTASIA
CONTINUATION OF
COMMUNICATION
ANNOUNCING THE BIRTH OF
ANASTASIA, SIGNED BY
NICHOLAS II AND
COUNTERSIGNED BY
COUNT LAMSDORF,
MINISTER OF FOREIGN
AFFAIRS
Courtesy The P.B. Corporation
ca. 1896
THE EMPRESS ALEXANDRA
FEODOROVNA
Courtesy The P.B. Corporation
PETERHOF—1901
THE EMPRESS ALEXANDRA
FEODOROVNA
THE GRAND DUCHESS ANASTASIA, THE TSESAREVICH ALEXEI
NICHOLAEVICH, AND THE EMPEROR NICHOLAS II ON A
TENDER APPROACHING THE “STANDARD”—ca. 1908
Courtesy The P. B. Corporation
THE TSESAREVICH ALEXEI,
THE EMPRESS ALEXANDRA,
AND THE EMPEROR
NICHOLAS II—ca. 1908
THE RUSSIAN IMPERIAL FAMILY ON VISIT TO BRITISH ROYAL
FAMILY—ENGLAND—1909
seated on the ground (l. to r.): the tsesarevich alexei and the
grand duchess anastasia. seated on chairs (l. to r.): mary,
princess of wales (later queen mary); nicholas ii; king
edward vii; the empress alexandra; george, prince of wales
(later king george v); and the grand duchess marie
nicholaevna. standing (l. to r.): prince edward david (later
prince of wales and king edward viii, now the duke of
windsor); queen alexandra; princess mary, now the princess
royal, dowager countess of harewood; princess victoria;
the grand duchess olga nicholaevna; and the grand duchess
tatiana nicholaevna.
the grand duke alexander mikhailovich and the grand
duchess xenia alexandrovna and their children (l. to r.): the
prince nikita, the princess irina, and the princes andrei,
dimitri, vasili, feodor, and rostislav—ca. 1909

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Match each statement with the correct term below.

1. ANS: F PTS: 1 DIF: Easy

Match each statement with the correct term below.

7. ANS: I PTS: 1 DIF: Easy

ANS: T PTS: 1 DIF: Easy OBJ: 1

ANS: T PTS: 1 DIF: Easy OBJ: 1

ANS: F PTS: 1 DIF: Easy OBJ: 3

ANS: F PTS: 1 DIF: Medium OBJ: 4

ANS: F PTS: 1 DIF: Medium OBJ: 5

ANS: F PTS: 1 DIF: Easy OBJ: 6

ANS: T PTS: 1 DIF: Medium OBJ: 7

ANS: T PTS: 1 DIF: Easy OBJ: 7

ANS: F PTS: 1 DIF: Medium OBJ: 6 | 7

ANS: T PTS: 1 DIF: Medium OBJ: 7

ANS: T PTS: 1 DIF: Medium OBJ: 6

ANS: F PTS: 1 DIF: Medium OBJ: 9

ANS: F PTS: 1 DIF: Medium OBJ: 10

ANS: T PTS: 1 DIF: Medium OBJ: 10

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.

a. Only statement I is correct.

a. Only statement I is correct.

17. A passive activity

a. Only statement I is correct.

18. A passive activity

a. Only statement I is correct.

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

a. Only statement I is correct.

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

a. Only statement I is correct.

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

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 Bowden's adjusted gross income for this year?

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

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

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.

a. Only statement I is correct.

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

a. Only statement I is correct.