Diane and Ed have equal capital and profits interests in the DE Partnership, and they share the economic risk of loss from recourse liabilities according to their partnership interests. In addition, Diane has a special allocation of all depreciation on buildings owned by the partnership. The buildings are financed with recourse liabilities. The depreciation reduces Diane’s capital account, and liquidation is in accordance with the capital account balances. Depreciation for the DE Partnership is $50,000 annually. Diane and Ed each have $50,000 capital account balances on January 1 of Year 1. Will the special allocation be acceptable for Year 1, Year 2, and Year 3 in the following independent situations?
a. The partners have no obligation to repay negative capital account balances, and the partnership’s operations (other than depreciation) each year have no net effect on the capital accounts.
b. The partners have an obligation to repay negative capital account balances.
c. The partners have no obligation to repay negative capital account balances. The partnership operates at its break-even point (excluding any depreciation claimed) and borrows $200,000 on a full recourse basis on December 31 of Year 2.