Krypton Partnership owns and operates an office building in the medical district of a large city. The property was contributed to the partnership several years ago by partner K. Under the terms of the partnership agreement, K is allocated 20% of the partnerships profits, gains, losses and deductions, other than depreciation. Depreciation is allocated 50% to K and 50% to the other partners. The office building is encumbered by a nonrecourse mortgage of $750,000. Its tax basis is $650,000 and its book value is $875,000.

Answer the following questions. Clearly show your work and explain your answers.

1. Under the general rules governing the allocation of partnership nonrecourse liabilities, how much of the nonrecourse liability will be allocated to K?

2. Would an allocation of $425,000 of the nonrecourse liability to K be acceptable under the regulations? Explain.