Question 1. What are the relevant factors to be considered in determ

1. What are the relevant factors to be considered in determining whether an activity is profit-seeking or a hobby?

2. In distinguishing whether an activity is a hobby or a trade or business, discuss the presumptive rule.

3. Assuming an activity is deemed to be a hobby, discuss the order and limits in which expenses must be deducted.

Amounts deductible under other Code sections had the activity been profit-seeking which do not affect adjusted basis are deducted next.

Deductions affecting adjusted basis (e.g., depreciation) are taken next. At any point where the expenses exceed income, the deduction is limited to the remaining income.

4. Describe the circumstances under which a taxpayer can receive rent income from a personal residence, but does not have to report it as gross income.

5. For a vacation home to be classified in the primarily rental use category, what attributes must be present?

6. For a vacation home to be classified in the personal/rental use category, what attributes must be present?

7. What is the appropriate tax treatment for expenditures paid by a taxpayer for another’s benefit?

8. Are there any exceptions to the rule that personal expenditures cannot be deducted?

9. Briefly discuss the disallowance of deductions for capital expenditures.

10. Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?

11. In a related party transaction where realized loss is disallowed, when can the disallowed loss be used by the buyer on the subsequent sale of the property? In the case of a related party disallowed loss transaction, can the related party seller’s disallowed loss be used by a taxpayer other than the related party buyer?

12. Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are brothers. The corporation uses the accrual method of accounting and the shareholders use the cash method. To provide Olive with funds to acquire additional working capital, the shareholders each loan Olive $100,000 with a 6% interest rate. At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder. From a timing perspective, when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.

13. Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.