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Health Department fines

Christy Albright and Dan Ralls formed the Charter Company on 11/30/2012, 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 11/30/2017 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 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 5/3/2010 and was sold for $10,000 on 6/9/2017.

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. (Note: according to the Form 4562 instructions, the depreciation from the rental activity would not need to be disclosed on Form 4562)

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 1000 shares of Alter Corporation, purchased on 1/20/2017 for $25,000 and sold on 4/10/2017 for $45,000.

Christy owns 60% of the partnership, and is an active partner. Christy is the Tax Matters 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 $77,000
Accounts Receivable 10,000 20,000
Inventory 15,000 10,000
Tax-exempt securities 100,000 100,000
Equipment 90,000 140,000
Accumulated depreciation -50,000 -66,000
Real estate 700,000 700,000
Accumulated depreciation -40,000 -60,000
Total assets 835,000 921,000
Accounts payable 10,000 20,000
Mortgages 500,000 500,000
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 7-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. 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.

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

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