L and M form the LM Partnership with equal cash contributions of $300,000. The partnership then borrows $1,400,000 and purchases several tracts of land at a total cost of $1,900,000. Immediately after the acquisition, the partnership’s Section 704(b) balance sheet appears as follows:

Tract 1 is subsequently distributed to L in a nonliquidating distribution. If Tract 1 is valued at $320,000 at the date of distribution, what will L’s Section 704(b) capital account be after the distribution, assuming no other assets are revalued?
a. $100,000.
b. $40,000.
c. $20,000.
d. $0.

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Assets: Cash Tract 1 Tract 2 Tract 3 Liabilities: Capital L Capital M $100,000 200,000 1,320,000 380,000 $2,000,000 $1,400,000 300,000 300,000 $2,000,000