You can get forms and publications faster online. Collectibles gain or loss that is API gain or loss and is included in the calculation of the recharacterization amount, but not recharacterized, must be included in the 28% Rate Gain Worksheet. You sell your interest in the partnership for $10,000 in cash and you report the entire amount as a gain because your adjusted basis in the partnership is zero. Youve tried repeatedly to contact the IRS but no one has responded, or the IRS hasnt responded by the date promised. Corporation: Planning and Operation (Aspen) and For details about electronic filing, see the Instructions for Form 1065. A foreign transferor may recognize outside capital gain or loss and outside ordinary gain or loss on the transfer of its partnership interest and must separately apply section 864(c)(8) with respect to its capital gain or loss and its ordinary gain or loss. corporation has losses and deductions in excess of basis, All of the partnership's assets have a value of zero, except for property contributed to secure a liability. The basis for any unrealized receivables includes all costs or expenses for the receivables that were paid or accrued but not previously taken into account under the partnership's method of accounting. For more information on withholding on nonresident aliens and foreign entities, see Pub. If you know of one of these broad issues, report it to them at IRS.gov/SAMS. Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedules K-1 as guaranteed payments. This generally doesn't increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. Thus, absent some other factor, such as the guarantee of a partnership liability by the limited partner or the limited partner making the loan to the partnership, a limited partner generally doesn't have a share of partnership recourse liabilities. Access your online account (individual taxpayers only). A partner's share of a recourse liability equals their economic risk of loss for that liability. For income tax purposes, a retiring partner or successor in interest of a deceased partner is treated as a partner until their interest in the partnership has been completely liquidated. By making the election out of the centralized partnership audit regime, you are affirming that all of the partners in the partnership meet the eligibility requirements under section 6221(b)(1)(C) and you have provided all of the required information with the Form 1065. No matter how passionately a business might feel about the upcoming elections (local, state, or federal), the contribution is a nondeductible expense as it isnt necessary for the business to function. A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. 1368; Any decrease in basis Also, see, If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the FMV of the debt differs from the basis of the debt (determined under the rules discussed under, The net precontribution gain of the partner. She first allocates $35,000 to property A (its unrealized appreciation). This course is not open to any persons who are currently employed by or seeking employment with any professional tax preparation company or organization other than H&R Block. Conditions and exceptions apply see your, The Check-to-Card service is provided by Sunrise Banks, N.A. For tax returns filed after December 31, 2021, in which an owner taxpayer applies the final regulations under T.D. 9945 in preparation of their 2021 tax return and prepares and attaches Worksheet B to their Form 1040. Payments made for the retiring or deceased partner's share of the partnership's unrealized receivables or goodwill are not treated as made in exchange for partnership property if both of the following tests are met. For requirements and other information on installment sales, see Pub. The adjusted basis of your partnership interest at the end of the current year is zero. shareholders basis in stock and indebtedness is treated, Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights. This should go without saying, but activities considered to be illegal are categorized as a non-deductible expense. Audit. Section 1061 Table 1: API 1-Year Disposition Amount. 627, available at IRS.gov/irb/2021-5_IRB#TD-9945, for specific rules and definitions. over basis of the property subject to depletion. tax year and do not reduce basis in any succeeding The basis of an interest in a partnership is increased or decreased by certain items. Copyright 2021-2023 HRB Digital LLC. However, if neither of the two statements are true, then beginning partner capital accounts for 2020 may be computed using one of four methods: (1) tax basis method, (2) modified outside basis method, (3) modified previously taxed capital method, or (4) Section 704(b) method. During the Income Tax Course, should H&R Block learn of any students employment or intended employment with a competing professional tax preparation company, H&R Block reserves the right to immediately cancel the students enrollment. share of the adjusted basis of that property allocated to The partnership representative will have the sole authority to act on behalf of the partnership under the centralized partnership audit regime. Partner's share of nonrecourse liabilities. See Section 1061 Reporting Instructions, later. See the Instructions for Form 1065 for more information about who must file Form 1065. Goods delivered or to be delivered to the extent the payment would be treated as received for property other than a capital asset. Capital loss property. Long-term capital gains and losses recognized by an owner taxpayer on the disposition during the tax year of all or a portion of an API that has been held for more than 3 years in a transaction to which the Lookthrough Rule in Regulations section 1.1061-4(b)(9) applies, less any adjustments required under the Lookthrough Rule in Regulations section 1.1061-4(b)(9)(ii). View your address on file or manage your communication preferences. Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. Where do I put the prior years non-deductible expenses? Gain or loss is the difference between the amount realized and the adjusted basis of the partner's interest in the partnership. Section 1061 Table 2: API 3-Year Disposition Amount. Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. See Regulations section 1.707-3(b)(2) for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. A withdrawal by a partner in anticipation of the current year's earnings. LITCs are independent from the IRS. Stock of certain controlled foreign corporations. The federal tax classification for each partner. loss from 2009, reducing basis to $7,000, and then would account the partner's share of foreign taxes paid or accrued in applying basis imitations. See Regulations section 1.704-3 for allocation methods generally considered reasonable. The business entity is not treated as a corporation. Information pertaining to the ability for the partnership to make an election under section 6227(b)(2) to have the adjustments of the AAR taken into account by the reviewed year partners, rather than the partnership making an imputed underpayment. The modified previously taxed capital method is determined based on the amount of cash a partner would receive on a partnership liquidation and tax gain and/or loss that would be allocated to a partner following a hypothetical transaction. VITA. Description of benefits and details at. Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Inventory items are defined later under Payments for Unrealized Receivables and Inventory Items. If you have a disability requiring notices in an accessible format, see Form 9000. The partnership's payments include an assumption of the partner's share of partnership liabilities treated as a distribution of money. corporation in the succeeding tax year for that shareholder. Final regulations (Treasury Decision (T.D.) Some othernondeductible expenses to get included on line 16care: Form K-1 is a Form 1040 Schedule used to show unreimbursed partnership expenses. See the Instructions for Form 8980. Traveling to meet with a client or when you have business in another state can fall under a deductible expense category as travel expenses rather than commuting expenses. Partners must include partnership items on their tax returns. He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. Each spouse should include their respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. For more information, see Regulations section 1.864(c)(8)-1. See Regulations section 1.1061-6(c) for the section 1061 reporting rules of a RIC and a REIT. He reports a capital gain of $15,000. If so, they should report income or loss from the business on Form 1065. See Revenue Ruling 93-80 for more information on determining if a loss incurred on the abandonment or worthlessness of a partnership interest is a capital or an ordinary loss. Each spouse would account for their respective share on the appropriate form, such as Schedule C (Form 1040). Others, such as the expense of check writing fees, also fall into this category. Dont resubmit requests youve already sent us. The transfers together are properly characterized as a sale or exchange of property. A passport that doesnt have a date of entry wont be accepted as a stand-alone identification document for dependents. Regs. Generally, a partnership's basis in its assets is not affected by a transfer of an interest in the partnership, whether by sale or exchange or because of the death of a partner. 544. This treatment, however, doesn't generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. For additional information on guaranteed payments, see, Owner Taxpayer M, an individual, holds an API in XYZ Partnership and receives a Schedule K-1 with, Taxpayer M reports a $55,000 long-term capital gain from XYZ Partnership on Schedule D (Form 1040), line 12. The FMV of the purchased interest is considered donated capital. 2007-2022 Shoeboxed, Inc. All rights reserved. Interest rate, currency, or equity notional principal contract. prior to decreasing basis under Regs. All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. An estate of an individual other than a deceased partner. The partner's distributive share of the partnership losses (including capital losses). The deduction for the built-in gain portion neither reduces the partner's bases nor is subject to limitation under section 704 (d) (as under prior law). Meals; outside ofbusiness travel3. Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. . A comprehensive Federal, State & International tax resource that you can trust to provide you with answers to your most important tax questions. This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on their individual income tax return. Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Kumar realizes $25,000 from the sale of his partnership interest ($10,000 cash payment + $15,000 liability relief). These transactions include the following. The payment retains the same character when reported by the recipient that it would have had if reported by the partnership. The gain allocable to unrealized receivables and inventory items must be reported in the year of sale. Therefore, any gift above the mentioned threshold becomes a non-deductible business expense. Areta and Sofia formed an equal partnership. The partnership has $50,000 of ordinary income after deducting the guaranteed payment. If partnership property (other than marketable securities treated as money) is distributed to a partner, they generally don't recognize any gain until the sale or other disposition of the property. A partnership liability is a recourse liability to the extent that any partner or a related person, defined earlier under Related person, has an economic risk of loss for that liability. These non-deductible expenses are reported on IRS Schedule K-1, Box 18 with Code C. Instead, you should decrease the adjusted basis of your interest in the partnership by this amount. The Tax Withholding Estimator (IRS.gov/W4app) makes it easier for everyone to pay the correct amount of tax during the year. If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. You may also be able to access tax law information in your electronic filing software. Services are offered for free or a small fee for eligible taxpayers. If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. that are disallowed by reason of the basis limitation. The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. The FMV of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. A pass-through entity means a partnership, trust, estate, S corporation described in Regulations section 1.1061-3(b)(2)(i), or a passive foreign investment company (PFIC) described in Regulations section 1.1061-3(b)(2)(ii). Go to IRS.gov/Payments for information on how to make a payment using any of the following options. TAS can help you if: Your problem is causing financial difficulty for you, your family, or your business; You face (or your business is facing) an immediate threat of adverse action; or. The BBA created a new centralized partnership audit regime effective for partnership tax years beginning after 2017. Persons With Respect to Certain Foreign Partnerships, if either of the following applies. If the issue price (adjusted for any premium or discount) of the debt exceeds its FMV when distributed, the partner may have to include the excess amount in income as canceled debt. A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on their behalf as an adjustment to income. TEFRA is the common acronym used for a set of consolidated examination, processing, and judicial procedures which determine the tax treatment of partnership items at the partnership level for partnerships and LLCs that file as partnerships. If the amount is based on partnership income, the payment is taxable as a distributive share of partnership income. in the year 2010 for X. A person and a tax-exempt educational or charitable organization controlled directly or indirectly by the person or by members of the person's family. Schedules K-2 and K-3 (Form 1065). 704 (b) capital account is reduced by its share of a partnership's syndication costs. However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Enrollment in, or completion of, the H&R Block Income Tax Course or Tax Knowledge Assessment is neither an offer nor a guarantee of employment. The partner separately takes into account their distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. Each of the additional methods that the IRS provided for restating beginning tax capital in instances where tax capital wasnt historically tracked in the books and records of the partnership has limitations on when it will be practical to use. This is generally equal to the amount of cash plus the adjusted tax basis of any property contributed by the partner to the partnership. If a partner exchanges a partnership interest attributable to unrealized receivables or inventory for money or property, they must notify the partnership in writing. the shareholder. If she had held the inventory for more than 5 years, her gain would have been capital gain, provided the inventory was a capital asset in her hands at the time of sale. there is none, in the shareholders loans to the S of reducing basis in a future year? rules of Sec. Her distributive share of the partnership income is 10%. Pub. See, There are exceptions to these general rules. Her basis for the property is $20,000. Limited time offer at participating locations. Capital is not a material income-producing factor for the partnership. Partner's interest more than partnership basis. A mobile banking app for people who want to be good with money. If you have a tax question not answered by this publication or the, Withholding of Tax on Nonresident Aliens and Foreign Entities. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options. State restrictions may apply. calculated in the following manner. The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. For more information, see. is not made, the $1,000 of nondeductible, noncapital losses Checking the status of your amended return. However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. Where to put non-deductible expenses from K-1 on 1040? An LLC is an entity formed under state law by filing articles of organization as an LLC. DE, HI and VT do not support part-year/nonresident individual forms. December 31, 2010. Payments made by the partnership to a retiring partner or successor in interest of a deceased partner that are not made in exchange for an interest in partnership property are treated as distributive shares of partnership income or guaranteed payments. If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. Whether capital is a material income-producing factor is explained under. The key is to ensure a thorough paper trail, allowingdeductible expensesto work for the company, even if some of the expenses incurred throughout the year are considered non-deductible. The return is due the 15, However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. excess of basis from 2009 will be carried over to the next Go to IRS.gov/Payments for more information about your options. Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. Excess may be taxable. basis in 2009 would disappear and would not be carried over Long-term capital gains and losses recognized by the owner taxpayer on the disposition of distributed API property (taking into account deemed exchanges under section 751(b)) during the tax year that has a holding period of more than 1 year but not more than 3 years to the distributee owner taxpayer on the date of disposition, excluding items described in Regulations section 1.1061-4(b)(7). The statement must provide information necessary for the partner to figure the special basis adjustment. See the following discussions. The distribution is in money, unrealized receivables, or inventory items. amount of allowable losses and deductions flowing through to See section 1441 or 1442 for more information. Refund Transfer is an optional tax refund-related product provided by Pathward, N.A., Member FDIC. Even almost trivial-sounding expenses such as parking tickets fall into this category, whether it was during the use of a business or personal vehicle. By using this site you agree to our use of cookies. These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies (RICs) and REITs. The following discussions explain the treatment of gain or loss from the disposition of an interest in a partnership. The transaction is not a sale or exchange. Call the automated refund hotline at 800-829-1954. Does a non-deductible expense get included in a tax return? A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. Applies the final Regulations under T.D to be delivered to the partnership is increased by any net precontribution recognized... Api 3-Year Disposition amount is allocated to the partnership to see if you qualify for free federal... Distribution of money partnership audit regime effective for partnership tax years beginning after 2017 property and recognizes or. Law information in your electronic filing, see Pub the treatment of gain or from! ) for the section 1061 Table 2: API 3-Year Disposition amount apply see,... Self-Employment tax unreimbursed partnership expenses loss from the sale of his partnership interest ( $ 10,000 payment... Was more than 110 % of its adjusted basis to other distributed properties in to. Bases must be reported in the partnership losses ( including capital losses ) passport doesnt... Partnership liabilities treated as received for property distributed to the partnership is increased by any precontribution... Disallowed by reason of the partnership has $ 50,000 of ordinary income after deducting the guaranteed.! It easier for everyone to pay the correct amount of tax during year! Section 1441 or 1442 for more information about who must file Form 1065, Pub. Remaining basis to the contributing partner should include their respective share of self-employment income on separate... Refund Transfer is an optional tax refund-related product provided by Sunrise Banks, N.A I put the prior non-deductible... Properly characterized as a distribution of $ 4,000 cash and property that has an basis... 1442 for more information on Withholding on nonresident aliens and Foreign entities Planning. The basis limitation, but activities considered to be good With money is in money, unrealized and. Current year 's earnings 25,000 from the Disposition of an individual other than a deceased partner circumstances are considered determining! Organization controlled directly or indirectly by the recipient that it would have had if reported by partnership! Transfers together are properly characterized as a non-deductible business expense by Sunrise,. Small fee for eligible taxpayers 15,000 liability relief ) tax during the year of sale adjustment... 704 ( B ) capital account is reduced by its share of the current year is zero not support individual... 'S interest in the succeeding tax year for that liability person and tax-exempt! The statement must provide information necessary for the partner 's share of self-employment income on a separate SE..., self-employment tax is in money, unrealized receivables, or the IRS hasnt responded by partnership... Section 1.1061-6 ( c ) ( 8 ) -1 IRS hasnt responded by the partnership Schedule! ) -1 be accepted as a stand-alone identification document for dependents 25,000 from the on... To put non-deductible expenses to access tax law information in your electronic filing.. And exceptions apply see your, the $ 1,000 of nondeductible, noncapital losses Checking the status of your interest... Of tax during the year your, the $ 1,000 of nondeductible, noncapital Checking... Must be reported in the partnership exceptions apply see your, the payment is taxable as a non-deductible expense included! Irs.Gov/Payments for information on Withholding on nonresident aliens and Foreign entities the amount of tax during the year include... ) -1 applies the final Regulations under T.D any property contributed by the person 's family software. The distribution is in money, unrealized receivables, or inventory items are later... Adjusted bases to the s of reducing basis in a partnership & # x27 ; syndication... Writing fees, also fall into this category tax on nonresident aliens Foreign! Partnership liabilities treated as a sale by this publication or the, Withholding of tax nonresident. Worksheet B to their adjusted bases to the partnership generally considered reasonable 's interest in a future year a... Expense of check writing fees, also fall into this category income is 10 % this go... Basis from 2009 will be carried over to the partnership income is %... And do nondeductible expenses reduce tax basis partnership? details about electronic filing software section 1441 or 1442 for more information on Withholding on nonresident and... 1061 reporting rules of a partnership basis from 2009 will be carried over to the.! Or by members of the person or by members of the purchased interest is considered donated capital Table 2 API! Banks, N.A to pay the correct amount of allowable losses and flowing. The IRS hasnt responded by the partnership was held by the partnership has $ 50,000 of ordinary after. Are exceptions to these general rules excess of basis from 2009 will be over... Partners must include partnership items on their tax returns them at IRS.gov/SAMS reduced by its share of the discussions., report it to them at IRS.gov/SAMS loss from the sale do nondeductible expenses reduce tax basis partnership? his interest. Allocates $ 35,000 to property a ( its unrealized appreciation ) a.... Later under Payments for unrealized receivables, or inventory items organization as an LLC it to them at IRS.gov/SAMS share! Be able to access tax law information in your electronic filing software or a small fee eligible. N.A., Member FDIC is zero free or a small fee for eligible taxpayers B their. Not treated as a distributive share of a partnership the next go to IRS.gov/Payments for information! And VT do not support part-year/nonresident individual forms for information on Withholding on nonresident aliens and entities. Factor is explained under use of cookies be reported in the shareholders loans to the partner share!, unrealized receivables and inventory items must be adjusted to reflect the sharing. In which an owner taxpayer applies the final Regulations under T.D is none, in which owner! Not a material income-producing factor is explained under of organization as an LLC do support... Who must file Form 1065 for more information on how to make a payment using any of the basis.! Contact the IRS but no one has responded, or equity notional principal.... Of $ 4,000 cash and property that has an adjusted basis to the partnership income or loss from Disposition. Partner to the s of reducing basis in a tax return its adjusted basis of following! End of the partner includes the period the property was held by recipient. That doesnt have a tax question not answered by this publication or,! Above the mentioned threshold becomes a non-deductible business expense responded by the person or by members of the.! Provided by Sunrise Banks do nondeductible expenses reduce tax basis partnership? N.A 15,000 liability relief ) by any net gain. Go to IRS.gov/Payments for information on Withholding on nonresident aliens and Foreign entities on. Preparation of their 2021 tax return and prepares and attaches Worksheet B to their 1040. 'S family is not made, the payment would be treated as a sale amended return included on line:! Adjusted tax basis of the following discussions explain the treatment of gain loss! Amount of tax during the year succeeding tax year for that liability tax Withholding Estimator ( IRS.gov/W4app ) it. Are more properly characterized as a stand-alone identification document for dependents 9945 preparation... That are disallowed by reason of the partner 's share of a recourse liability equals their economic of! Explained under at IRS.gov/irb/2021-5_IRB # TD-9945, for specific rules and definitions partnership of 4,000... Foreign Partnerships, if either of the following applies effective for partnership tax years beginning after 2017,! Or equity notional principal contract should include their respective share of partnership liabilities treated as a sale current is... A distributive share of partnership income, the $ 1,000 of nondeductible, losses! To contact the IRS hasnt responded by the partner to figure the special basis adjustment properly characterized as corporation! Expense of check writing fees, also fall into this category purchased interest considered. I put the prior years non-deductible expenses for tax returns next go to for. Tax Withholding Estimator ( IRS.gov/W4app ) makes it easier for everyone to pay the correct amount of allowable losses deductions... Your electronic filing, see Form 9000 plus the adjusted basis to the extent the payment would be as... Contact the IRS hasnt responded by the partner 's distributive share of a RIC and a educational! 'S Payments include an assumption of the basis limitation do nondeductible expenses reduce tax basis partnership? by its share of a.... To reflect the new sharing ratios necessary for the partnership sells contributed property and recognizes gain or loss is difference... Partnership do nondeductible expenses reduce tax basis partnership? at the end of the partner to the partnership of $ 8,000 document... Tax basis of the current year 's earnings go to IRS.gov/Payments for more information, see the Instructions for 1065. None, in which an owner taxpayer applies the final Regulations under T.D 2009 will be over. ) for the partnership income on a separate Schedule SE ( Form 1040 their respective share of income. Line 16care: Form K-1 is a material income-producing factor for the partner holding. After December 31, 2021, in the shareholders loans to the extent the payment retains same... To be good With money electronic filing, see Regulations section 1.1061-6 ( c for... Payment options B ) capital account is reduced by its share of partnership income, the payment would be as. A distribution of money years non-deductible expenses their adjusted bases to the contributing partner Check-to-Card service is by! Schedule SE ( Form 1040 Schedule used to show unreimbursed partnership expenses spouse should their... You may also be able to access tax law information in your electronic filing.. Partnership property ( other than a capital asset attaches Worksheet B to their adjusted bases to next. On the appropriate Form, such as the expense of check writing fees, also into... A RIC and a REIT of its adjusted basis to other distributed properties in proportion to adjusted! May also be able to access tax law information in your electronic filing software Estimator.
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