PARTNERSHIP TAX RETURN PROBLEM Harry Hook, Sara Slicer, and Fred Fore share a passion for golf and decide to go into the golf club manufacturing business together. On January 2, 2016, Hook, Slicer, and Fore form the Slicenhook Partnership, a general partnership. Slicenhook's main product will be a perimeter-weighted titanium driver with a patented graphite shaft. All three partners plan to actively participate in the business. The partners contribute the following Contribution Land, FMV $460,000 Basis $460,000, Mortgage $60,000 $400,000 $400,000 Partner Harry Hook Sara Slicer Fred Fore Harry had recently acquired the land with the idea that he would contribute it to the newly formed partnership. The partners agree to share in profits and losses equally Slicenhook elects a calendar year end and the accrual method of accounting. In addition, Slicenhook received a $1,500,000 recourse loan from HugeBank at the time the contributions were made. Slicenhook uses the proceeds from the loan and the cash contributions to build a state-of-the-art manufacturing facility ($1,200,000), purchase equipment ($600,000), and produce inventory ($400,000). With the remaining cash, Slicenhook invests $45,000 in the stock of a privately owned graphite research company and retains $55,000 as working cash. Slicenhook operates on a just-in-time inventory system so it sells all inventory and collects all sales immediately. That means that at the end of the year, Slicenhook does not carry any inventory or accounts receivable balances. During 2016, Slicenhook has the following operating results: Sales Cost of goods sold Interest income from tax-exempt bonds Qualified dividend income from stock Operating expenses Depreciation (tax) $ 1,126,000 400,000 900 1,500 126,000 51 79 on equipment Equipment Building $39,000 81,000 24.000 144,000 Interest expense on debt 120,000 The partnership is very successful in its first year. The success allows Slicenhook to use excess cash from operations to purchase $15,000 of tax-exempt bonds (you can see the interest income already reflected in the operating results). The partnership also makes a principal payment on its loan in the amount of $300,000 and a distribution of $100,000to each of the partners on December 31, 2016