Partnership Tax Return Problem I

Christy Albright and Dan Ralls formed the Charter Company on 11/30/2010, and chose a

tax year ending on 11/30. Charter was formed to operate a restaurant (at 7848 Pesca Dr.,

San Francisco, CA 94123) and rent out some space in the restaurant building. Charter

elected to be taxed as a partnership, and the income statement for the year ending

11/30/2015 is as follows:

Sales

COGS

Tax-exempt interest

Interest income

Dividend income from domestic corporations

Nonqualified dividend income from foreign

corporations

Gain on sale of equipment

Depreciation

Repairs and

maintenance

Rent expense

Salaries to nonpartners

Salaries to partners

Income from real estate rentals

Expenses from real estate rentals (includes

$10,000 of book depreciation)

Gain on sale of stock (held < 1 yr.)

Health Department fines

Investment interest expense

$400,000

-150,000

6,000

4,000

5,000

Subtotal

$176,000

3,000

10,000

-30,000

-7,000

-12,000

-60,000

-30,000

100,000

-80,000

20,000

-2,000

-1,000

Charter chooses the accrual method of accounting. The equipment sold was an imported

oven that had been fully depreciated. It originally cost $4,000 on 5/3/2008 and was sold

for $10,000 on 6/9/2015.

The tax depreciation amount for the year was $40,000, not including $5,000 of Section

179 expense that Charter chose to take on some equipment they purchased, and not

including the $10,000 per year depreciation of the rental real estate, which is included in

the $80,000 of costs above. (Note: according to the Form 4562 instructions, the

depreciation from the rental activity would not need to be disclosed on Form 4562)

Of the $30,000 of guaranteed payments, $20,000 goes to Christy and $10,000 is paid to

Dan. Assume that 40% of the investment interest expense is nondeductible because it

relates to the tax-exempt interest. The stock sold was 1000 shares of Alter Corporation,

purchased on 1/20/2015 for $25,000 and sold on 4/10/2015 for $45,000.

Christy owns 60% of the partnership, and is an active partner. Dan owns 40%, but is a

passive, limited partner. During the year Christy was distributed $60,000 and Dan was

distributed $40,000. The balance sheet of the partnership is as follows:

2015 CCH Incorporated. All Rights Reserved.

Beginning

Ending

Cash

Accounts Receivable

Inventory

Tax-exempt securities

Equipment

Accumulated depreciation

$10,000 $10,000 15,000 100,000 90,000 -50,000 700,000 -40,000 77000 20000 10,000 100,000 140000 -66000 700000 -60000 Total assets 835,000 921,000 10,000 20000 Mortgages Capital, Christy Capital, Dan 500,000 195,000 130,000 500000 240,600 160,400 Total liabilities and capital 835,000 921,000 Accounts payable All of the $54,000 of equipment purchased this year was restaurant equipment, and was 5-year property eligible for the Section 179 deduction. Aside from the equipment expensed under Section 179, all of the new equipment was depreciated under MACRS. All of the mortgage debt is qualified nonrecourse debt, and none of it is payable in the next year. Fill out a Form 1065 and all other appropriate forms for Charter and the related Schedules K-1 for Christy and Dan. The necessary addresses and TINs are as follows: Christy Albright 5050 Winding Way San Francisco, CA 94123 SS# 056-36-4498 Dan Ralls 3656 Pleasant Ridge Lincoln, NE 68501 SS# 547-86-1154 Charter Company 7848 Pesca Dr. San Francisco, CA 94123 EIN 85-4409231 2015 CCH Incorporated. All Rights Reserved.