Choice "b" is correct. $250,000 maximum exclusion from taxable income.

Rule: An individual may exclude from income up to $250,000 gain provided that the property was the

taxpayer's primary residence for 2 of the last 5 years. Married taxpayers may exclude gains up to

$500,000.

Choice "a" is incorrect. $320,000. Ryan, age 57, was not married. Thus, his exclusion was limited to

$250,000.

Choice "c" is incorrect. The $125,000 exclusion was old law and eliminated for sales after 5/6/97.

Choice "d" is incorrect, per the above rule.

Choice "a" is correct. Trade date.

Gain or loss on a year-end sale of listed stock arises on the trade date.

Rule: Whether on the cash or accrual method of accounting taxpayers who sell stock or securities on

an established securities market must recognize gains and losses on the trade date, rather than on

the settlement date.

Choices "b", "c", and "d" are incorrect, per the above rule.

Choice "c" is correct. Wolf's passive loss for 1989 is $5,000 ($100,000 operating loss × 5% interest in

partnership).

Choice "a" is incorrect. Wolf did not materially participate in the partnership, so the loss was passive.

Choice "b" is incorrect. Wolf's passive loss of $5,000 could not be reduced by his distributive share of

the partnership's "interest income" totaling $1,000. Interest income is considered "portfolio income,"

and neither the partnership nor a partner can offset it against passive losses.

Choice "d" is incorrect. No items of income or deduction from portfolio income or activities in which

the taxpayer materially participates may be combined or offset with passive losses unless the activity

generating the loss is completely disposed of in a taxable transaction.

"E" is correct. $1,250. The Moores itemized deductions in 1993 because such deductions were $1,450 in excess of the standard deduction. The amount of state taxes deducted in 1993 was $2,000, which (along with the fact that the Moores were not subject to alternative minimum tax, which may have reduced their tax benefit) indicates that the Moores received a tax benefit in 1993 from deducting the $1,250 state tax refund they received in 1994. The $1,250 is taxable in 1994.

Choice "c" is correct. $2,000.

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