Final answer:
A closely held C corporation that is not a personal service corporation cannot deduct passive losses against active income according to U.S. tax law. This means Wolf Corporation's $33,000 passive loss cannot offset its $55,000 active income and this restriction is aimed at preventing tax avoidance.
Step-by-step explanation:
The main answer to the question concerning the deductibility of passive losses for a closely held C corporation that is not a personal service corporation pertains to U.S. tax law. Typically, C corporations can use passive activity losses (PALs) to offset passive income. However, if the corporation is closely held (meaning that five or fewer individuals own more than 50% of the corporation's stock) and is not a personal service corporation, it may face restrictions on its ability to use these losses. Specifically, under the tax guidelines, closely held C corporations can only deduct passive losses to the extent they have passive income; they cannot use passive losses to offset active income.In the scenario provided, Wolf Corporation has active income of $55,000 and a passive loss of $33,000. Given that the corporation is not a personal service corporation and assuming it meets the definition of being closely held, it would not be able to use the $33,000 passive loss against the $55,000 active income. This implies that Wolf Corporation's ability to deduct passive losses is constrained under current tax rules, potentially affecting the company's tax liability.Explanation in more than 100 words: The distinction between active income and passive income is critical in tax law, especially for closely held C corporations. Active income often comes from the corporation's regular business activities, whereas passive income is typically generated from real estate, rental activities, or businesses in which the taxpayer does not materially participate. For a closely held C corporation not engaged in personal services, the $33,000 passive loss from an activity in which it does not materially participate cannot be used to offset the $55,000 active income generated from its business operations. Specifically, the tax law prevents such companies from offsetting their active income with losses from passive activities, to maintain a more equitable tax system.In conclusion, the Wolf Corporation would not be allowed to deduct the passive loss against its active income given the restrictions on closely held C corporations that are not personal service corporations. This restriction aims to curb tax avoidance by ensuring that corporations can only deduct losses from passive activities against passive income, not active income.