• Partner Andre contributes cash of $70,000 for a 70% interest in capital and profits. Partner Bernard contributes an asset with a basis of $20,000 for the remaining 30% interest in capital and profits. Partner Bernard depreciated this asset using straight-line and the asset had a remaining useful life of 5 years (its original useful life was 10 years). After forming, the partnership earned ordinary income of $2,000.

If you work through the numbers related to the depreciation allocation in this problem, you will discover that this situation involves a ceiling effect. As you know, the partnership can choose among three methods to deal with this ceiling effect. Effective tax planning plays an important role in driving the choice of the most desirable method.

Question: Which allocation method (traditional, traditional with curative allocations or remedial method) would be most attractive? What would the tax profile of each partner be for a particular method to be attractive to her?