John, Jackie, and Todd came together to form a partnership. John contributed land he had held for one year, including a mountain cabin where customers could not only train, but stay overnight. The land had a basis of $25,000 and the mountain cabin had a basis of $21,500, and the estimated fair market value at the time of the contribution was $25,000 for the land and building. Jackie contributed an warehouse that she had purchased two years ago, with a basis of $43,000 and a fair market value of $50,000. The warehouse had a useful life of 8 years remaining and was encumbered by a $36,000 recourse loan. Ed contributed $50,000 in cash. At the beginning of the first year, the partnership purchased equipment for $40,000. The equipment was 5 year equipment, but had to be scraped at the end of the second year. The partnership received no reimbursement for insurance on the equipment. In the first year, the partnership lost $12,000 of ordinary income. In the second year, the partnership lost an additional $18,000 of ordinary income and another $33,000 capital loss on some equipment that was purchased at the beginning of the first year, and then sold at the end of the second year. Special allocations required under Section 704(c) are not required due to the small disparities rules. The partnership agreement meets the requirements for special allocations under Section 704(b) but instead of requiring that negative capital accounts be restored, the partnership agreement contains a qualified income offset provision for partner?s with negative capital accounts. Show the allocation of losses to each partner for the first and second years, as well as any applicable loss limitations and carry forwards. Indicate the character of the allowed and loss carryforwards where appropriate. Show the outside basis for each partner for the end of the year. Repeat a. and b. assuming that the loan securing the armory is a non-recourse loan?

Assets Inside Basis FMV Liabilities Capital Account Outside Basis Capital Account