At the beginning of year 1, Eric and Fiona each contributed $10,000 cash to EF Partnership as equal partners. Assume the partnership depreciates the equipment according to the following hypothetical schedule.

A. Determine the partnership's gain (loss) for each of the five years and the beginning (beg.) of the sixth year.

B. Assume that depreciation recapture applies but that the at-risk and passive activity loss rules do not apply. Using the results from Part a and a 7% discount rate, determine the present value of tax savings for both partners combined over the five-year period including the beginning of the sixth year. Why do these tax savings occur? Begin by determining the tax or tax savings in this step, and then the present value (PV) of the tax or tax savings for both partners combined over the five-year period including the beginning of the sixth year in the following step.

Why do these tax savings occur? The total tax savings without discounting is _____. With discounting, the total tax savings is _____. Thus, without the at-risk or PAL rules the partners obtain _____.

C. Now assume the at-risk and passive activity loss rules do apply. Determine what the partners recognize over the five-year period including the beginning of the sixth year. Do the partners have any tax savings in this situation? Why or why not? Complete the table below to determine the partners' net gain (loss) each period and the resulting tax (tax savings) and present value (PV) of that tax (tax savings) assuming the at-risk and PAL rules do apply. Review the gain (loss) computations from Part a. D. Provide a schedule analyzing each partner's outside basis over the five-year period including the sixth year. Complete the table below showing the combined basis for both partners. Note that each partner will only have half the amounts shown in the table. We will complete the table one period at a time. Review the gain (loss) computations from Part a.

Data Table
Year	Depreciation
1	72,000
2	45,000
3	27,000
4	14,400
5	14,400
6	7,200

Data Table: The partnership immediately borrowed $160,000 on a nonrecourse basis and used the contributed cash and loan proceeds to purchase equipment costing $180,000. The partnership leases out the equipment on a five-year lease for $9,000 per year. Over the five-year period, the partnership makes the following principal and interest payments on the loan:
Year	Principal	Interest
1	2,600	6,400
2	3,300	5,700
3	3,300	5,700
4	4,200	4,800
5	4,200	4,800