Partnership Tax Return Problem I

Christy Albright and Dan Ralls formed the Charter Company on 11/30/2008, 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 11/30/2013 is as follows:

Sales	$400,000
COGS	-150,000
Tax-exempt interest	6,000
Interest income	4,000
Dividend income from domestic corporations	5,000
Nonqualified dividend income from foreign corporations	3,000
Gain on sale of equipment	10,000
Depreciation	-30,000
Repairs and maintenance	-7,000
Rent expense	-12,000
Salaries to nonpartners	-60,000
Salaries to partners	-30,000
Income from real estate rentals	100,000
Expenses from real estate rentals (includes $10,000 of book depreciation)	-80,000
Gain on sale of stock (held < 1 yr.)	20,000
Health Department fines	-2,000
Investment interest expense	-1,000
Subtotal	$176,000

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 5/3/2006 and was sold for $10,000 on 6/9/2013.

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 1/20/2013 for $25,000 and sold on 4/10/2013 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:

Beginning	Ending
Cash	$10,000	77000
Accounts Receivable	$10,000	20000
Inventory	15,000	10,000
Tax-exempt securities	100,000	100,000
Equipment	90,000	140000
Accumulated depreciation	-50,000	-66000
Real estate	700,000	700000
Accumulated depreciation	-40,000	-60000
Total assets	835,000	921,000
Accounts payable	10,000	20000
Mortgages	500,000	500000
Capital, Christy	195,000	240,600
Capital, Dan	130,000	160,400
Total liabilities and capital	835,000	921,000

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