Partnership Tax Return Problem – Fall 2023
DUE: OCTOBER 5, 2023
Christy Albright and Dan Ralls formed the Charter Company on 11/30/2014, and chose a
tax year ending on 11/30. Charter was formed to operate a restaurant (In the Charter
Building 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 11/30/2022 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 5/3/2015 and was sold
for $10,000 on 6/9/2022.
The tax depreciation amount for the year was $20,000, not including $14,000 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.
All of the $30,000 of guaranteed payments goes to Christy. Assume that 40% of the
investment interest expense is nondeductible because it relates to the tax-exempt interest.
The stock sold was 1,000 shares of Alter Corporation, purchased on 1/20/2022 for
$25,000 and sold on 4/10/2022 for $45,000.
Christy owns 60% of the partnership, and is an active partner. Christy is the Partnership
Representative. 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
Accounts Receivable
Inventory
Tax-exempt securities
Equipment
Accumulated depreciation
Real estate
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
Accounts payable
Mortgages
Capital, Christy
Capital, Dan
10,000
500,000
195,000
130,000
20000
500000
240,600
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 7year property eligible for the Section 179 deduction. Aside from the equipment expensed
under Section 179, all of the new equipment was depreciated under MACRS. There is no
AMT adjustment for depreciation except for the adjustment due to the current year
purchases (the net adjustment for prior year purchases was zero). All of the mortgage
debt is qualified nonrecourse debt, and none of it is payable in the next year. Both the
rental and the restaurant are qualified businesses for purposes of the Section 199A
qualified business income deduction. All of the depreciable assets are deemed to be
associated with a qualified business under Section 199A, and the salaries to employees
are all W-2 wages under Section 199A.
For simplicity, assume that the capital accounts for GAAP purposes and the capital
accounts for Tax purposes are the same.
REQUIRED:
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