The Callaway Real Estate Limited Partnership $($Callaway$)$ was formed on January $1,2022,$ to

purchase, construct, and manage residential real estate. The partnership adopted the accrual

method of accounting and a calendar year for federal tax purposes. On February $2,2022,$

Callaway purchased the Berkshire Manor apartment complex for a total price of $$5,000,000.$

$$1,000,000$ of the purchase price was allocated to the land and $$4,000,000$ was allocated to the

buildings. Callaway financed the acquisition by obtaining a fifteen$-$year $$4,500,000$ mortgage

from a savings and loan that is unrelated to any of the Callaway partners. The mortgage is

secured by the apartment complex but is fully recourse to the partnership. No other properties

were purchased during $2022.$ A summary of partnership operating revenues and expenses for

$2022$ is attached. In addition to operating revenues and expenses, the partnership also

calculated depreciation on the apartment complex for $2022$ in the amount of $$127,273$

$($$$4,000,000$ depreciable basis $/27\mathrm{.}5=$ $$145,455$ annual depreciation X $10\mathrm{.}5$ months $/12$

months$).$

The Callaway partnership agreement provides that the corporate general partner, Tambour

Properties Inc. $($Tambour$),$ will receive an annual management fee equal to $5$ percent of the

gross rental income earned by the partnership. This fee is reasonable by local industry

standards. In return for the fee, Tambour will provide all necessary services so that Callaway

will not have to hire any partnership employees. All partnership taxable income, gain, or loss will

be allocated $5$ percent to Tambour and $95$ percent to the limited partners based on each limited

partner$$s specified percentage interest. The agreement provides that partners$$ capital accounts

will be determined and maintained in accordance with the Section $704($b$)$ regulations, and that

liquidating distributions will be made in accordance with capital account balances. As general

partner, Tambour is required to restore any deficit balance in its capital account upon

liquidation; limited partners are not subject to this deficit restoration requirement. However, the

partnership agreement does contain a $$qualified income offset$$ to satisfy the alternate test for

economic effect of Reg. Sec. $1\mathrm{.}704-1($b$)(2)($ii$)($d$).$

On January $20,2022,$ Dr$.$ Samantha Ashin contributed undeveloped land to Callaway in

exchange for a $38$ percent limited partnership interest $($i$.$e$.,$ Samantha will receive $40$ percent of

the $95$ percent allocations to the limited partners$).$ Tambour, as general partner, agreed to this

exchange because the land is ideally situated for future development as residential rental

property. Samantha inherited the land a number of years ago and her tax basis in the property

is only $$125,000$; the appraised value of the land at date of contribution was $$275,000$ and the

entry to Samantha$$s partnership capital account properly reflected this contributed value. The

partnership agreement provides that limited partners cannot be called upon to make additional

capital contributions in the future.

Samantha Ashin is a plastic surgeon employed by a medical professional corporation. During

$2022,$ she received a salary of $$230,000.$ She also received a total of $$19,400$ of dividend and

interest income from her investment portfolio, and an allocation of $$13,200$ of operating

business income from a partnership in which she has a $3$ percent limited partnership interest.

Callaway Real Estate Limited Partnership

Operating Revenues and Expenses

For January $1$December $31,2022$

Gross rental revenue $$2,100,000$

Monthly operating expenses $$1,675,000$

Repairs and maintenance $ $212,000$

Interest expense $ $562,000$

Property taxes $ $188,000$

Total expenses $$2,637,000$

Net cash flow from operations$*($$$537,000)$

$*$Callaway financed the negative cash flow from operations by fully recourse short$-$term

borrowing. The management fee has not been included in expense

I need for you to prepare a detailed tax research memo that will be included in the client file to document the advice we are giving to the client. They will want to know the partnership$$s taxable income or loss for $2022,$ and the amount of the income or loss that is $(1)$ allocable to and $(2)$ deductible by Samantha Ashin on her $2022$ Federal individual income tax return. Also, include what would change if Samantha was a general partner instead of a limited partner. Be sure to include all research pertaining to the relevant authority as well as the tax implications for this partnership.

Compute Callaway's taxable income or loss for $2022,$ and determine the amount of the income or loss that is $(1)$ allocabled to and $(2)$ deductible by Samantha Ashin on her $2022$ Federal individual income tax return. How would your answer to $(2)$ change, if Samantha was a general partner instead of a limited partner?

Present your analysis using a research memorandum format. In preparing this memorandum, support your answers with any sources of authority that apply.