Problem 2.

Don and Joe each contribute $100 to their newly formed general partnership (each partner is required to restore any deficit in the partner's capital account upon liquidation of the partnership). The partners agree to make liquidating distributions in accordance with the partners' positive capital account balances. Assuming the capital accounts are maintained under the rules in Regulations 1.704-1(b)(2)(iv), discuss whether the following allocations have economic effect.

a) In its first year, the partnership earns $100, which is allocated as $70 to Don and $30 to Joe. (

b) Would the answer to Question 2a change if the partnership were a limited liability company in which neither partner had an obligation to restore a deficit capital account balance upon liquidation? (

c) Would the answer to Question 2a change if the partners bad agreed to share liquidating distributions equally?

(d) In its first year, the partnership loses $150 and allocates the loss entirely to Don.

(e) Would the answer to Question 2d change if the partnership were a limited liability company in which neither partner had an obligation to restore a deficit capital account balance upon liquidation?

(f) Would the answer to Question 2d change if the partners bad agreed to share liquidating distributions equally?