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George owns two passive investments, Activity A and Activity B. He plans to sell Activity A in the current year or next year. Juanita has offered to buy Activity A this year for an amount that would produce a taxable passive activity gain to George of $115,000. However, if the sale, for whatever reason, is not made to Juanita, George believes that he could find a buyer who would pay about $7,000 less than Juanita. Passive activity losses and gains generated and expected to be generated) by Activity B follow: Two years ago ($35,000) Last year This year (35,000) (8,000) (30,000) Next year Future years Minimal profits All of Activity B's losses are suspended. George is in the 32% tax bracket. If your answer is zero enter "O". a. If Activity A is sold to Juanita in the current year: How are the suspended losses for Activity B treated? What is the Federal income tax related to the sale of Activity A? $ b. If Activity A is sold next year for $7,000 less than Juanita's offer: How are the suspended losses for Activity B treated? What is the Federal income tax related to the sale of Activity A? If George defers the sale until next year, he will his short-term cash flow. In addition, the expected gain from the sale offset by all of the suspended passive activity loss from Activity B. They reduce the gain from the sale of Activity A. They are nondeductible and are carried over to next year. They increase the taxable gain from the sale of Activity A. increase decrease can be cannot be

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