Fred and Manuel each contribute $$100,000$ to the newly formed FM P$/$S in exchange for a $50\%$ interest. The partnership uses the available funds to acquire equipment costing $$160,000$ and to fund current operating expenses. The partnership agreement provides that the depreciation will be allocated $95\%$ to Fred and $5\%$ to Manuel. All other items of income and loss will be allocated equally between the partners. In accordance with the partnership agreement, upon liquidation of the partnership, property will be distributed to the partners in accordance with their capital account balances. Also in accordance with the partnership agreement, any partners with a negative capital account must contribute cash in the amount of the negative balance to restore the capital account to zero.

In its first year of operations, the partnership reported an ordinary loss $($before depreciation$)$ of $$40,000$ and depreciation expense of $$32,000.$ In its second year, operations broke even $($no gain or loss$),$ and the partnership reported depreciation expense of $$51,200.$ On the first day of the third year, the partnership sold the equipment for $$120,000$ and distributed the cash in accordance with the partnership agreement. The partnership was liquidated at this time.

a$.$ Calculate the partners$$ AB in their partnership interests at the end of the first and second tax years. Are any losses suspended?

b$.$ Calculate the partners$$ bases in their partnership interest after reflecting any gain or loss on the disposal of the equipment.

c$.$ How will partnership cash balances be distributed to the partners on liquidation?

d$.$ Does the allocation provided in the partnership agreement have economic effect? Is it

substantial?

e$.$ What observation can you make regarding the value of a deduction to each partner?