Problem 8- Reverse 704(c) Transactions-Revaluation. Assume that the partnership revalues its capital accounts as permitted by 1.704-1(b)(2)(iv)(f) to reflect fair market value of the building as of Floyd's admission, and elects to use the traditional method for allocations with respect to the revalued property. Reconstruct the partnerships balance sheet.

(a) Gain allocation. If the building is subsequently sold at a time that its basis is still $40, how would the partnership allocate the resulting book and tax gain or loss if the building is sold, in the alternative, for:

(i) $120

(ii) $90

(iii) $15

(b) Depreciation allocation. Assume the partnership will recover the remaining $40 tax basis in the building at the rate of $10 per year over the buildings remaining 4 year life under ACRS. How will the partnership allocate those deductions if it uses the traditional method for making 704(c) allocations?

Problem 9. Reverse 704(c) Transactions. No Revaluation. Assume that the partnership did not choose to revalue, or book up its capital accounts to fair market value upon admission of Floyd. Determine how the partnership should allocate its $80 of tax and book gain if the property were sold for $120. If your answer is an equal one third division of the gain, might any of the partners object to that result? Why? What other alternative does the partnership have? See 704(c), the last sentence of 1.704-1(b)(2)(iv)(f) and 1.704-1(b)(1)(iii) and (iv).