Reverse Sec. 704(c) Transactions

Several years ago, A and B formed a partnership that acquired an apartment building to rent. A and B are equal partners. ON the first day of the current year, when the building has a value of $120 and the partnerships adjusted tax basis in the building $40, A and B admit C as a one-third partner in exchange for a $60 cash contribution.

Assume that the partnership revalues its capital accounts as permitted by Sec. 704-1(b)(2)(Iv)(f) to reflect FMV of the building as of Cs admission, and elects to use the traditional method for allocations with respect to the revalued property. Reconstruct the partnerships balance sheet.

After revaluation, A and B each have a book of 60 and a tax of 20, while C has a book and tax of 60. On the asset side, the building has a book of 120 and a basis of 40 (along with the 60 of cash), so there is an 80 BIG that is allocable 40 to A and 40 to B.

(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:

$120

$90

$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 Sec. 704(c) allocations?