ACCT $597$

Assignment $4$

The KJS partnership is formed with a contribution of the following properties:

Partner

Property

FMV $($Agreed$)$

Tax Basis

Katie

Cash

$2,000,000$

$2,000,000$

Jim

Equipment

$2,000,000$

$400,000$

Sarah

Cash

$2,000,000$

$2,000,000$

Assume that Jim$$s contributed equipment will be depreciated at the rate of $20\%$ per year for both book and for tax.

The partners have agreed to split all items one$-$third each. Their agreement complies with the alternate test for economic effect.

In Year $1$ of the partnership, the following items are reported for both book and for tax purposes:

Gross receipts $3,000,000$

Operating Expenses $<1,800,000>$ all items of ordinary income$/$loss$,$ line $1$ of the K$-1$

Net Income $1,200,000$

The foregoing items do NOT include the depreciation for Jim contributed equipment.

REQUIRED:

Show book and tax capital accounts for each member assuming the traditional method is used.

Show book and tax capital accounts for each member assuming the traditional method with curative allocations is used.

Report the beginning and ending unrecognized section $704($c$)$ gain for Jim under each method.