X, Y, and Z form the equal XYZ partnership by contributing $100,000 each, and purchasing some equipment for $300,000. The equipment has a depreciable life of five years, and all depreciation (straight line) is allocated to X. Capital accounts are properly maintained. Any distributions in liquidation will be made according to the capital accounts of each partner. No partners are required to restore deficit capital accounts upon liquidation, but if partner Xs capital account ends up with a deficit balance, X is to be allocated income sufficient to offset the difference as soon as possible (the partnership agreement contains a qualified income offset provision). Income aside from depreciation is $30,000 each year.

Questions: 1. How much depreciation will be allocated to each partner in year 1? What is the capital account balance of each partner at the end of year 1?

2. How much deprecation will be allocated to each partner in year 2? What is the capital account balance of each partner at the end of year 2?

3. How much depreciation will be allocated to each partner in year 3? What is the capital account balance of each partner at the end of year 3?

4. Assume that the partnership is liquidated at the end of year 2. How much will each partner receive in liquidation and why? Explain your answer.