Don and Joe each contribute $100 to their newly formed general partnership (each partner is required to restore any deficit in the partner's capital account upon liquidation of the partnership). The partnership borrows $900 on a recourse basis and buys a $1,000 building. The building generates $100 of depreciation a year for ten years, and the partnership has no other items of income or loss. The partners agree to allocate all losses equally until their capital accounts are zero; after that the partnership specially allocates all losses to Don. Assume that capital accounts are maintained in accordance with the rules in Regulations  1.704-1(b)(2)(iv) and that liquidating distributions are to be made in accordance with positive capital account balances.

(a) Do the allocations have economic effect?

 

(b) Would the answer to  (a) part change if Don and Joe forma limited partnership with Joe serving as the general partner. Can anything be done to prevent reallocation of the losses?

Answer rating: 100% (QA)

a Do the allocations have economic effect Yes the allocations have economic effect The partnership i... View the full answer