G and L form a limited partnership. L contributes $2,000, and G, who does not contribute cash, will use her immense brainpower to earn money for the partnership. The business deal is that L receives all cash distributions until L has received back the amount of her capital investment. Subsequent distributions will be split 80% to L and 20% to G. In Year 1, the partnership buys two parcels of land, Blackacre and Whiteacre, each for $1000. At year-end, the partnership sells Blackacre for $1100 and distributes the entire proceeds of $100 to L.

1. suppose that the business deal is that L is to receive all cash distributions until L received an amount equal to her capital investment, plus a preferred return of 4% annually on that investment (until distributed), before any cash is distributed to G. The partnerships cash flow distributions provisions (i.e., the waterfall) provides that
   1. L is entitled to distributions in the amount of her initial contribution of $2000,
   2. L is entitled to distributions equal to her accumulated preferred return,
   3. G is entitled to her catch-up, a distribution equal to 20 of the sum of (ii) and (iii), and
   4. The balance, if any, is to be distributed 80:20 between L and G.

How should the $100 gain on Blackacre be allocated?

In year 2, the partnership continues to hold Whiteacre but does not otherwise engage in any tax significant transactions. How should the partnership take into account Ls 4% preferred return?