Problem 1. Anne, Charlotte and Emily are equal partners in the ACE partnership. On January 1 of this year, Annes outside basis is $250 and ACEs balance sheet (including FMVs) is as follows:

AssetsLiabilities & Capital AB/BookFMVLiabilitiesCash$240$240$150Accts Rec.7560 Inventory90150 Machinery55100 Building200500 Stock90300 Goodwill0300 Total$750$1650 Capital Accounts Tax/Book Anne$200 Charlotte200 Emily200 Total$600

a) Jane purchased the 1/3 interest from Anne for $500 cash. What is Jane's initial outside basis and the balance in her capital account at the time of purchase?

(b) In the absence of a 754 election, what would be the tax consequences to Jane if she held the interest for three years and then sold it for $500. Assume that during this period of time the partnership engaged in no transactions and there was no change in the value of its assets (ignore cost recovery allowances).

(c) If the partnership makes a 754 election:

(i) What is the amount of the 743(b) adjustment and how should it be allocated among the partnerships assets?

(ii) Is this adjustment reflected in Janes "book" capital account under 1.704-1(b)(2)(iv)(m)(2)?

(iii) How should the partnership compute its cost recovery allowance on the building and the machinery for the year of Jane's purchase and thereafter?

Please provide a solution with detailed explanation. Thanks!