home / study / business / finance / finance questions and answers / Ralph And Potsie Are General Partners Of Happy ... Your question has been answered Let us know if you got a helpful answer. Rate this answer . Question: Ralph and Potsie are general partners of Happy Lem... Ralph and Potsie are general partners of Happy Lemonade, a general partnership that operates a lemonade stand. Ralph contributed $12,000 for a 60% capital interest and Potsie contributed $8,000 for a 40% capital interest in the partnership. The partnership earns $100,000 in its first year.

Questions:

1) If the partnership agreement provides that all profits and losses are to be shared equally, how is the $100,000 income allocated?

2) Assume for this question only, that Arthur opened a competing lemonade stand called Cool Lemonade, and Happy Lemonade suffered a loss in their first year of $20,000 (i.e., the invested capital) instead of earning income of $100,000. Will an equal allocation of such loss have substantial economic effect under IRC Section 704(b)?

3) Assume that the $100,000 income of the partnership consists of $50,000 in capital gain and $50,000 in ordinary income and that Ralph and Potsie agree that Ralph will be allocated the $50,000 in capital gain (as he has a $50,000 capital loss carryforward) and Potsie will be allocated the $50,000 in ordinary income. Does this allocation have substantial economic effect under IRC Section 704(b)?

4) Assume that in the first year the partnership borrows $20,000, further assume that Ralph and Potsie agree to share profits and losses 60% to Ralph and 40% to Potsie; what is the effect of such borrowing on Ralph and Potsies outside tax basis?

5) Same as question number 4, however assume that Happy Lemonade is a limited liability company taxed as a partnership instead of a general partnership?

6) Assume that Happy Lemonade is a limited liability company taxed as a partnership, in its first year of operations is suffers a loss of $40,000. This represents the invested cash contributions from Ralph ($12,000) and Potsie ($8,000) and the borrowed funds of $20,000. Ralph and Potsie share profits and losses 60% and 40% respectively. How should the $40,000 loss be allocated under IRC Section 704?