The ABC partnership has three equal partners, A, B, and C, and the following balance sheet:

Assets Partners Capital

A.B. F.M.V. A.B. F.M.V

Cash $60,000 $60,000 A $70,000 $80,000

Capital Asset #1 90,000 60,000 B 70,000 80,000

Capital Asset #2 40,000 60,000 C 70,000 80,000

Capital Asset #3 20,000 60,000

$210,000 $240,000 $210,000 $240,000

A receives capital asset #1 in an operating distribution. A has a one-ninth interest worth $20,000 in the partnership capital and profits after the distribution.

(a) What result to A and the partnership if there is no Internal Revenue Code Section 754 election? Reconstruct the balance sheet after the distribution.

(b) What result to A and the partnership if the partnership has made an Internal Revenue Code Section 754 election? Reconstruct the balance sheet after the distribution.

(c) How should any basis adjustments be allocated among the partners?