5. A Closer Look at How 1.752-3 Works Over Time -- Do only if specifically assigned Basic Facts: Two years ago, G and L formed a partnership to which L contributed $90 cash and G contributed a building with a FMV of $900, subject to a nonrecourse mortgage of $890. No principal payments were due on the mortgage for five years. At the time of contribution Gs basis was $450. G had been depreciating the building using the straight-line method of depreciation and there were 9 years remaining in its recovery period at the time of contribution. The partners agreed to share all items of income and loss 90/10. For its first two years of operations, GLs out-of-pocket expenses precisely equaled its income so that it had a tax loss of equal to its cost recovery on the building of $50. Assume throughout that GL allocates all excess nonrecourse liabilities in accordance with how G and L share profits, and that it uses the traditional method for accounting for 704(c) gain.

Questions:

1. What is each partners initial basis in the partnership? Construct GLs initial balance sheet.

2. What is each partners outside basis after the first years operations? Construct GLs balance sheet at year-end. 28

3. What is each partners outside basis after the second years operations? Construct GLs balance sheet at the end of the second year.