Question

In determining whether an activity should be classified as a hobby, the tax law provides a rebuttable presumption with regard to the profits or losses of an activity. Which of the following statements describes the profit/loss test which must be satisfied in order to meet the presumption that the activity is not a hobby?
a. The activity shows a profit for 3 of the 7 previous years.
b. The activity shows a loss for 3 of the 7 previous years.
c. The activity shows a loss for 3 of the 5 previous years.
d. The activity shows a profit for 3 of the 5 previous years.
e. None of these choices are correct.

Answer 1

Answer:

d. The activity shows a profit for 3 of the 5 previous years.

Explanation:

Rebuttable presumptions are assumption in which all facts are considered true unless someone comes and proves it. The activity classified as a hobby if the test is conducted for profits. The activity should show profits in 3 of the past 5 years to be presumed as a hobby. Therefore the correct answer is d.