The Hallmark Real Estate Limited Partnership formed 1, 2020, using the accrual method of accounting. On February 2, 2020, Hallmark purchased the Handover apartment complex, $5,000,000. $1,000,000 allocation land and $4,000,000 allocation to buildings. The acquisition was financed with a fifteen-year $4,500,000 mortgage unrelated to Hallmark partners. The mortgage is fully recourse to the partnership. No other properties were purchased during 2020. Depreciation on the apartment complex for 2020, $127,273 ($4,000,000 depreciable basis / 27.5 = $145,455 annual depreciation X 10.5 months / 12 months). No other partnership employees are hired. All partnership taxable income, gain, or loss allocated 5 percent to Mr. Channel and 95 percent to the limited partners based on each specified percentage interest. Partners capital accounts determined and maintained in accordance with the Section 704 (b) regulations. Liquidating distributions made in accordance with capital account balances. As general partner, Mr. Channel 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. 1.704-1(b)(2)(ii)(d).

(Dr. Austin contributed land in exchange for a 38 percent with tax basis of $125,000; the appraised value of $275,000. Dr. Austins salary as a plastic surgeon $230,000. Dividend interest from other investment $19,400. Allocation $13,200 from other limited partnership is 3 percent interest).

Hallmark Real Estate Limited Partnership

Operating Revenues and Expenses

For January 1December 31, 2020

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)

*Hallmark financed the negative cash flow from operations by fully recourse short-term borrowing. The management fee has not been included in expenses.

Requirements: Compute Hallmarks taxable income or loss for 2020, and determine the amount of the income or loss that is (1) allocable to and (2) deductible by Dr. Austin on his 2020 Federal individual income tax return. Present your analysis using a research memorandum format. In preparing this memorandum, support your answers with any sources of authority that apply.