1. A and B form the AB Partnership, a general partnership, with cash contributions of $50,000 each. Each partner has a one-half interest in the capital, profits, and losses of the partnership and an unlimited obligation to restore any deficit balance in the partner's capital account on liquidation. The partnership purchases an apartment building for $100,000 on January 1, Year 1. A wishes to shelter income from non-partnership activities, so the partnership agreement allocates to A the entire depreciation deduction of %5,000 per year. The partners agree to reflect the depreciation allocation by appropriately adjusting A's capital account and to distribute proceeds on liquidation in accordance with their capital accounts. Assume that other expenses exactly equal income. Does the allocation possess economic effect? what cash would be distributed to the partners on January 1, Year 4, if the property were sold alternatively for $85,000, $100,000, or $70,000 and the partnership subsequently liquidated? what additional provisions should be included in the partnership agreement in the event that the partners do not agree to restore any deficit balances in their capital accounts?
2. A and B form the AB Partnership, a general partnership, each contributing $5,000. The partnership agreement requires the partners to restore any deficit balance in their respective capital accounts upon liquidation. The partnership borrows $90,000 on a recourse basis and purchases a building for $100,000 on January 1, Year 1. Assuming the depreciation expense is $5,000 per year, the parties agree that all depreciation will be allocated to A, and other expenses exactly equal income, what are their capital accounts on January 1, Year 4? what are their tax bases? what results if the building is sold alternatively for $85,000, $100,000, or $70,000 and thereafter the partnership satisfies the liability?