Your clients, Tidewell Investments, Inc. (Rosa Parkington, President), and Tory Chadwell, each contributed $200,000 of cash to form the Virtual Management Partnership, a limited partnership. Tidewell is the general partner, and Tory is the limited partner. The partnership used the $400,000 cash to make a down payment on a building. The rest of the building's $4,000,000 purchase price was financed with an interest-only nonrecourse loan of $3,600,000, which was obtained from an independent third-party bank. All partnership items are allocated equally between the partners except for the MACRS deductions and building maintenance, which are allocated 70% to Tory and 30% to Tidewell. The partnership wants to satisfy the "economic effect" requirements of Reg. 1.704-1 and 1.704-2 and will reallocate MACRS, if necessary, to satisfy the requirements of the Regulations. Under the partnership agreement, liquidation distributions will be paid in proportion to the partners' positive capital account balances. Capital accounts are maintained as required in the Regulations. Tidewell Investments has an unlimited obligation to restore its capital account, while Tory is subject to a qualified income offset provision. Assume that all partnership items, except for MACRS, will net to zero throughout the first three years of the partnership operations. Also, assume that each year's MACRS deduction will be $200,000 (to simplify the calculations).

Evaluate the allocation of MACRS in each of the three years under Reg. 1.704-1 and -2.