Final answer:
Gyeong's loss from a passive activity is divided based on tax regulations, with $40,000 suspended under the passive activity loss rules, corresponding to her investment amount, and $10,000 suspended under the at-risk rules, as it exceeds the amount invested.
Step-by-step explanation:
The student's question pertains to how Gyeong's loss from a passive activity is characterized under tax law, focusing on the passive activity loss rules and the at-risk rules. After investing $40,000 for a 20% interest in a passive activity that generates a loss of $250,000, with Gyeong's share being $50,000, we need to determine how the loss is treated. Considering the passive activity loss rules and the at-risk rules, two separate standards govern how losses can be claimed. The passive activity loss rules limit the deduction of passive activity losses to the income generated from other passive activities. Since Gyeong invested $40,000, this amount becomes the threshold that can be at risk under these rules. At-risk rules further limit loss deductions to the amount that the taxpayer has at stake in the activity.
Given Gyeong's situation, $40,000 is suspended under the passive activity loss rules because it corresponds to her investment and is the limit she can claim on losses. The remaining $10,000, which exceeds her initial investment, is suspended under the at-risk rules as it goes beyond the amount she has economically at risk in the investment. Therefore, the correct characterization of her loss is:
a. $40,000 is suspended under the passive activity loss rules and $10,000 is suspended under the at-risk rules.