Chapter 11, Problem 47P

LO.2, 3, 7, 11 Kristin Graf (123 Baskerville Mill Road, Jamison, PA 18929) is trying to decide how to invest a $10,000 inheritance. One option is to make an additional investment in Rocky Road Excursions in which she has an at-risk basis of $0, suspended losses under the at-risk rules of $7,000, and suspended passive activity losses of $1,000. If Kristin makes this investment, her share of the expected profits this year will be $8,000. If her investment stays the same, her share of profits from Rocky Road Excursions will be $1,000. Another option is to invest $10,000 as a limited partner in the Ragged Mountain Winery; this investment will produce passive activity income of $9,000. Write a letter to Kristin to review the tax consequences of each alternative. Kristin is in the 24% tax bracket.