S and T form the ST Partnership. S contributes $100 and T contributes $200. Total income for Year 1 is ordinary income of $250. There is no difference between 704(b) income and tax income. Allocation of income is based on the amount of cash that would be distributed if the partnership were to liquidate.

The liquidation provision of the partnership agreement provides the following:

To T to the extent of her unreturned capital.

To T until she receives a 20% simple return, for each year, on her unreturned capital.

To S to the extent of her unreturned capital.

To S until she receives a 5% simple return, for each year, on her unreturned capital.

1/3 to S and 2/3 to T.

(a) What is the ending capital at the end of year 1 for each partner based on a hypothetical liquidation.

(b) What is each partners 704(b)/taxable income for year 1.