The Callaway Real Estate Limited Partnership (Callaway) was formed on January 1, 2021, 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, 2021, 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 full recourse to the partnership. No other properties were purchased during 2021. A summary of partnership operating revenues and expenses for 2021 is attached. In addition to operating revenues and expenses, the partnership also calculated depreciation on the apartment complex for 2021 in the amount of $127,273 ($4,000,000 depreciable basis / 27.5 = $145,455 annual depreciation × 10.5 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 Regulations Section 1.704-1(b)(2)(ii)(d). On January 20, 2021, 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 a 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 the 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. In 2021, 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

Requirements

Compute Callaway's taxable income or loss for 2021, and determine the amount of the income or loss that is (1) allocable to and (2) deductible by Samantha Ashin on her 2021 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. Note that this is an individual project.

Callaway Real Estate Limited Partnership
Operating Revenues and Expenses
For January 1–December 31, 2021

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 expenses.

Answer rating: 100% (QA)

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