Fredstone Consolidated, Inc., and Gradison Enterprises, Inc., are both real estate developers. Each entity owns a 50% general partner interest in Realty Partners, GP, a general partnership. Fredstone and Gradison each contributed $15,000 to form the partnership. The partnership uses the $30,000 contributed by the partners and a recourse loan of $100,000 obtained from an unrelated third-party lender to acquire $130,000 of rental properties. (All amounts are in thousands.) The partners believe that they will generate extensive tax losses in the first year due to depreciation expense and initial cash-flow requirements. Fredstone and Gradi- son agreed to share losses equally. To make sure that the losses can be allocated as intended, they included a provision in the partnership agreement requiring each partner to restore any deficit balance in their partnership capital account upon liq- uidation of the partnership. Fredstone also was willing to include a provision that requires it to make up any deficit balance within 90 days of liquidation of the partnership. This provision does not apply to Gradison; instead, it must restore any deficit balance in its capi- tal account within three years following liquidation of the partnership. No interest accrues on the deferred restoration payment. Can Realty allocate the $100,000 recourse debt equally to the two partners, so that they can deduct their respective shares of partnership losses? Explain.

Research Problem