In the current year, Bob invested $50,000 for a 20% interest in a partnership in which he was a material participant. The partnership incurred a loss, and Bob's share was $75,000. Which of the following statements regarding Bob's investment is NOT correct?
1) Because Bob has only $50,000 of capital at risk, he cannot deduct more than $50,000 against his other income.
2) Bob's nondeductible loss of $25,000 may be carried forward and used when the at-risk rules permit the claiming of such amount.
3) If Bob has taxable income of $30,000 from the partnership in the following year (and no other transactions that affect his at-risk amount), he can use all of the $25,000 loss carried forward from this year.
4) Bob's $75,000 loss is nondeductible in the current year and in the following year under the passive activity loss rules.

A The correct analysis of the tax treatment of Bob's income is that he is limited to a $50,000 deduction against his other income because that is his at-risk amount. The remaining $25,000 is a loss carryforward. If he has taxable income of $25,000 or more in subsequent years, then Bob's disallowed loss may be taken. The at-risk rules are applied before the passive activity rules.

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