Paolo is a 25% partner in the

 Paolo is a 25% partner in the Capri partnership and has decided to
terminate his partnership interest. He will sell his partnership interest to the two remaining
37.5% partners, Giuseppe and Isabella, for $105,000 cash and the assumption of Paolo’s share
of Capri’s liabilities. Under this option, Giuseppe and Isabella would each pay $52,500
($52,500 X 2 = $105,000) for half of Paolo’s interest.
Capri reports the following balance sheet as of the termination date:
Assets: Tax Basis FMV
Cash $ 80,000 $ 80,000
Receivables 40,000 40,000
Inventory 50,000 80,000
Land 50,000 60,000
Totals $ 220,000 $ 260,000
Liabilities and capital:
Liabilities $ 50,000
Capital – Paolo 85,000
– Giuseppe 42,500
– Isabella 42,500
Totals $ 220,000
========================================================================
B)
You are the ‘Tax Supervisor’ for the ‘Land of OZ’: Tax Preparation Service, in Cleveland, Ohio, and you
need to review the Capri Federal Form 1065 before the partner’s appointment tomorrow.
Facts
OMG: YOU FOUND MISTAKES in the 1065!!
How did this happen?
Answer: As soon as you pick up the 1065, you review the 1065 you shout out: “Wait a minute!!”
You find mistakes as you look at the 1065!!
Oh, No!!!
You discover that there are math mistakes, lack of entries in the 1065, etc.
OK!
You take a deep breath and decide that it is better to get it done tonight, then face an angry client
tomorrow morning. So you begin to work!!
Instructions:
1. Review the federal form 1065 as a pdf file that is attached. {Sidebar: You can link to instructions if
you must at the IRS website, but it may not be necessary, if you just use the form with math and
logic.}
2. Link to the following to get an EMPTY 1065:
http://www.irs.gov/pub/irs-pdf/f1065.pdf
YOU can enter all the information with corrections into the EMPTY 1065 right on the IRS website.
3. Save your CORRECTED 1065 and submit it as a SEPARATE attachment to your 7.1.2 submission to
your instructor. CLUE: make sure you print your name as the preparer, or else the IRS will charge you a
‘penalty’!
LIMITATION: After you call your employee that made this MESS on the tax return, he agrees to come
in early and prepare the individual partner’s Schedule K-1. Therefore, you can leave the filling out of
each partner’s Schedule K-1 to him.
PLEASE USE A TABLE FOR YOUR ANSWERS. EXCEL WOULD BE FINE TOO, BUT NO CELL FORMULAS.

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