On January 1, Year 1, Gordon and Leon form a limited partnership to acquire and operate a rental apartment building. Leon, the limited partner, contributes $90 and Gordon, the general partner, $10. The partnership obtains a nonrecourse loan from an unrelated financial institution for $900 and purchases a building (on leased land) for $1,000. The loan is secured by the building. The loan requires interest to be paid currently, but does not call for any principal payment for 5 years. The building is depreciable over 10 years at the rate of $100 per year.

The partnership agreement contains the following provisions:

1. The agreement satisfies the alternate test for economic effect under 1.704- 1(b)(2)(ii)(d), i.e., it contains the requisite provisions for capital account maintenance and distribution of liquidation proceeds. Although Gordon has a deficit makeup obligation Leon does not, but the agreement includes a QIO
2. The agreement includes a "minimum gain chargeback" provision that complies with 704-2(f).
3. All income and loss, other than nonrecourse deductions, are allocated 90% to Leon and 10% to Gordon until the first time that the partnership recognizes income and gain that exceed losses sustained in prior years. Thereafter, all income, gain and loss are allocated 50% to Gordon and 50% to
4. Nonrecourse deductions are allocated 80% to Leon and 20% to
5. Non-liquidating cash distributions are divided 10% to Gordon and 90% to Leon until they have each recovered their initial capital contributions (i.e., $10 to Gordon and $90 to Leon). Thereafter, all non-liquidating cash distributions are to be shared 50%-50%.

For the taxable Years 1, 2 and 3, the partnership has rental income of $70, operating expenses of $10, interest expense of $60, and a cost recovery deduction of $100, for a net loss of $100.

Problems: (a) Is the 80/20 split of nonrecourse deductions permissible? How much flexibility do Gordon and Leon have to allocate partnership nonrecourse deductions? Specifically, which of the following would be permissible?

	G	L
(i)	50%	50%
(ii)	10%	90%
(iii)	1%	99%

(b) Assume that on January 1, Year 4 the partnership defaults on the mortgage and transfers the building (then worth $600) to the lender by deed in lieu of foreclosure, and liquidates. What are the appropriate tax allocations and cash distributions to Gordon and Leon for Years 1 through 4?

(c) What if, instead, on January 1 Year 4, the partnership sells the building for $1,100 and liquidates. What are the appropriate tax allocations and distributions to Gordon and Leon?

(d) What if, instead, in Year 3, the partnership borrows an additional $100, using the building as security, and distributes the cash to the partners in the ratio of 10/90, in accordance with the partnership agreement. What is the aggregate partnership minimum gain at the end of the year, and what is each partners share of PMG? If the partnership then sells the building on January 1, Year 4, what are the appropriate allocations and distributions?

(e) What difference would it make in part (a) if Gordon had guaranteed the original $900 loan to the lender?

Please provide correct answers with detailed explanation please.? Thanks!