C is corrent. The requirement is to determine Zimmerman’s passive loss resulting from his 10% general partnership interest in Monahan Associates. A partnership is a pass-through entity and its items of income and loss pass through to partners to be included on their tax returns. Since Zimmerman does not materially participate in the partnership’s sports equipment business, Zimmerman’s distributive share of the loss from the partnership’s sports equipment business is classified as a passive activity loss. Portfolio income or loss must be excluded from the computation of the income or loss resulting from a passive activity and must be separately passed through to partners.
Portfolio income includes all interest income, other than interest income derived in the ordinary course of a trade or business. Interest income derived in the ordinary course of a trade or business includes only interest income on loans and investments made in the ordinary course of a trade or business of lending money, and interest income on accounts receivable arising in the ordinary course of a trade or business. Since the $12,000 of interest income derived by the partnership resulted from a temporary investment, the interest income must be classified as portfolio income and cannot be netted against the $150,000 operating loss from the sports equipment business. Thus, Zimmerman will report a passive activity loss of $150,000 x 10% = $15,000 and will report portfolio income of $12,000 x 10% = $1,200.
A is incorrect. Zimmerman’s passive loss equals $150,000 × 10% = $15,000.
B is incorrect. Zimmerman’s passive loss equals $150,000 × 10% = $15,000.
D is incorrect. Zimmerman’s passive loss equals $150,000 × 10% = $15,000.
|
