Problem 1. Abner, Betty and Clara form the ABC partnership. Abner contributes land worth $2500 in which A has a basis of $1000. Betty and Clara each contributes $1000 cash. Abner is to have a 50% interest in profits, losses, and capital; Betty and Clara are each to have 25% interests. As part of the basic business transaction, immediately after formation, the partnership distributes $500 to Abner.

(a) Prior to enactment of 707(a)(2)(B), how would the transaction be treated?

(b) After enactment of 707(a)(2)(B), what are the tax consequences to Abner and the partnership as a result of this transaction? Show the partnerships tax and book balance sheets after the transaction.

(c) How would your analysis change if the distribution to equalize capital accounts occurred one year after formation? Three years after formation? Numbers are not necessary.

(d) Suppose, instead of distributing $500 cash, the partnership purchased a bond for $500. According to the partnership agreement, Abner is allocated 99% of all income, gain and loss from the bond. All other partnership items are allocated 50-25-25. Three years after formation, the bond is distributed to Abner.