Research Problem 2. Five years ago, Bridget decided to purchase a limited partnership interest in a fast-food restaurant conveniently located near the campus of Southeast State University. The general partner of the restaurant venture promised her that the investment would prove to be a winner. During the process of capitalizing the business, $2,000,000 was borrowed from Northside Bank; however, each of the partners was required to pledge personal assets as collateral to satisfy the bank loan in the event that the restaurant defaulted. Bridget pledged shares of publicly traded stock (worth $200,000, basis of $75,000) to satisfy the bank's requirement. The restaurant did a good business until just recently, when flagrant health code violations were discovered and widely publicized by the media. As a result, business has declined to a point where the restaurant's continued existence is doubtful. In addition, the $2,000,000 loan is now due for payment. Because the restaurant cannot pay, the bank has called for the collateral provided by the partners to be used to satisfy the debt. Bridget sells the pledged stock for $200,000 and forwards the proceeds to the bank. Bridget believes that her share of the restaurant's current and suspended passive activity losses can offset the $125,000 gain from the stock sale. As a result, after netting the passive activity losses against the gain, none of the gain is subject to tax. How do you react to Bridget's position?
Research Problem 2. Five years ago, Bridget decided to purchase a limited partnership interest in a fast-food restaurant conveniently located near the campus of Southeast State University. The general partner of the restaurant venture promised her that the investment would prove to be a winner. During the process of capitalizing the business, $2,000,000 was borrowed from Northside Bank; however, each of the partners was required to pledge personal assets as collateral to satisfy the bank loan in the event that the restaurant defaulted. Bridget pledged shares of publicly traded stock (worth $200,000, basis of $75,000) to satisfy the bank's requirement. The restaurant did a good business until just recently, when flagrant health code violations were discovered and widely publicized by the media. As a result, business has declined to a point where the restaurant's continued existence is doubtful. In addition, the $2,000,000 loan is now due for payment. Because the restaurant cannot pay, the bank has called for the collateral provided by the partners to be used to satisfy the debt. Bridget sells the pledged stock for $200,000 and forwards the proceeds to the bank. Bridget believes that her share of the restaurant's current and suspended passive activity losses can offset the $125,000 gain from the stock sale. As a result, after netting the passive activity losses against the gain, none of the gain is subject to tax. How do you react to Bridget's position?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Research Problem 2. Five years ago, Bridget decided to purchase a limited
partnership interest in a fast-food restaurant conveniently located near the campus
of Southeast State University. The general partner of the restaurant venture
promised her that the investment would prove to be a winner. During the process of
capitalizing the business, $2,000,000 was borrowed from Northside Bank; however,
each of the partners was required to pledge personal assets as collateral to satisfy
the bank loan in the event that the restaurant defaulted. Bridget pledged shares of
publicly traded stock (worth $200,000, basis of $75,000) to satisfy the bank's
requirement.
The restaurant did a good business until just recently, when flagrant health code
violations were discovered and widely publicized by the media. As a result, business
has declined to a point where the restaurant's continued existence is doubtful. In
addition, the $2,000,000 loan is now due for payment. Because the restaurant cannot
pay, the bank has called for the collateral provided by the partners to be used to
satisfy the debt. Bridget sells the pledged stock for $200,000 and forwards the
proceeds to the bank. Bridget believes that her share of the restaurant's current and
suspended passive activity losses can offset the $125,000 gain from the stock sale. As
a result, after netting the passive activity losses against the gain, none of the gain is
subject to tax.
How do you react to Bridget's position?
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