Mary and Carol each contribute $50,000 to their newly formed general partnership (each partner is required to restore any deficit in the partner's capital account upon liquidation of the partnership). The partnership borrows $900,000 on a non- recourse basis and buys a $1,000,000 building. The building generates $100,000 of depreciation a year for ten years, and the partnership has no other items of income or loss. The partners agree to allocate all losses equally until their capital accounts are zero; after that the partnership specially allocates all losses to Mary. Assume that capital accounts are maintained in accordance with the rules in Regulations §1.704-1(b)(2)(iv) and that liquidating distributions are to be made in accordance with positive capital account balances. Do the allocations have economic effect in years 1, 2 and 3?
Mary and Carol each contribute $50,000 to their newly formed general partnership (each partner is required to restore any deficit in the partner's capital account upon liquidation of the partnership). The partnership borrows $900,000 on a non- recourse basis and buys a $1,000,000 building. The building generates $100,000 of depreciation a year for ten years, and the partnership has no other items of income or loss. The partners agree to allocate all losses equally until their capital accounts are zero; after that the partnership specially allocates all losses to Mary. Assume that capital accounts are maintained in accordance with the rules in Regulations §1.704-1(b)(2)(iv) and that liquidating distributions are to be made in accordance with positive capital account balances. Do the allocations have economic effect in years 1, 2 and 3?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Mary and Carol each contribute $50,000 to their newly formed general partnership
(each partner is required to restore any deficit in the partner's capital account upon
liquidation of the partnership). The partnership borrows $900,000 on a non-
recourse basis and buys a $1,000,000 building. The building generates $100,000
of depreciation a year for ten years, and the partnership has no other items of
income or loss. The partners agree to allocate all losses equally until their capital
accounts are zero; after that the partnership specially allocates all losses to Mary.
Assume that capital accounts are maintained in accordance with the rules in
Regulations §1.704-1(b)(2)(iv) and that liquidating distributions are to be made in
accordance with positive capital account balances. Do the allocations have
economic effect in years 1, 2 and 3?
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