Trevor and Kamile want to buy a race car. Trevor races cars in his spare time and Kamile keeps track of his prize money and time records. They negotiated a fixed price of $175,000 (for the race car) with a dealer. Under the contract, the amount and timing of the principal payments are based on Trevors prize earnings; Trevor and Kristi agree to pay the dealer 10% of the profits Trevor earns from racing the car, after reduction for car-maintenance costs, each year for ten years or until the principal is paid, whichever is sooner. All the principal is due in the tenth year if it is not already paid, and the unpaid principal bears adequate interest. Does the relationship between Trevor and Kristi, on the one hand, and the dealer, on the other hand, create an entity separate from its owners for federal tax purposes? 2. Mike, Seth and Betty form a partnership to develop an Internet web page. Seth and Betty, the more practical partners, invest $60,000 cash each. Mike is an energetic creative person but has no capital to invest. He agrees to supply his ideas and services in exchange for a one-third interest. At the outset, the partners agree to share capital and profits equally. Explain the tax consequences to the partners and the partnership upon formation. How would the result change if Mike agrees to forfeit his one- third interest in the partnerships capital and profits if he leaves the partnerships service before the web page is developed?

3. Steve, Karson, Derrick, and Ellen form a general partnership to acquire a building in Casper, WY. The partnership plans to renovate the building. The partnership hopes to either sell the building at a profit or lease it. Steve, Karson, Derrick, and Ellen each contribute $10,000 to the partnership. The partnership borrows $960,000 on a recourse basis. Under the applicable state general partnership act, all the partners are jointly and severally liable for all recourse debts; however, their agreement for bearing losses determines which one of them bears the ultimate loss with respect to one another. The partnership uses the capital contributions and the loan proceeds to acquire the building and complete the renovations. If the partners agree to share all profits and bear all losses equally, what are their shares of the partnerships $960,000 recourse liability? What if the partners agree to share profits equally but to allocate losses 70%, 20%, 5%, and 5% respectively? Assuming the same unequal loss allocations, what if the loan is nonrecourse and Derricks father agrees to guarantee it?