QUESTION 5

1. Nick sells his interest in a passive activity for $200,000. He has an adjusted cost basis of $100,000 and prior years' losses of $40,000 that were suspended due to the passive activity loss restrictions.

   What is the tax effect of Nick's sale?

   		$200,000 gain
   		$100,000 gain
   		$60,000 gain
   		$140,000 gain
   		No gain or loss.

QUESTION 6

1. Angelo incurred $40,500 of interest expense this year related to his investments. His investment income includes $5,000 of interest, $7,000 of qualified dividends, and a $20,000 net capital gain on the sale of securities. The maximum amount of Angelos investment interest expense deduction for the year is:

   	a.	$0
   	b.	$40,500
   	c.	$12,000.
   	d.	$32,000.
   	e.	$20,000