John, Paul, George and Ringo form a general partnership, Apple Records Production (ARP), which is treated as a partnership for federal tax purposes. The partnership agreement provides that all the income, gain, deduction, loss, and credit of ARP shall be allocated 30 percent to John; 30 percent to Paul; 20 percent to George and 20 percent to Ringo. The partnership agreement complies with all of the "big three" requirements for economic effect under section 1.704-1(b)(2)(ii)(b) of the Treasury regulations.

John, Paul and George each contribute $100,000 cash in exchange for their respective partnership interest. In exchange for his partnership interest, ringo contributes a portfolio of stocks and bonds, with a fair market value of $400,000 and a basis to Ringo of $400,000; the portfolio is subject to a security interest (mortgage) securing a recourse loan with an outstanding principal balance at the time of the contribution of $300,000, so that Ringo's "equity" in the portfolio is $100,000. ARP assumes the $300,000 recourse debt.

During the first year of its operations, ARP repays $40,000 of principal on the loan, plus interest on the outstanding balance throughout the year. ARP's gross income and deductions (including interest paid) for the year just happen to offset each other exactly. At the end of the year, ARP's balance sheet shows assets with an aggregate basis and book value of $560,000.

Answer each of the following questions:

A. What is the basis of each partner's interest in ARP immediately after its formation, and at the end of the first year of its operations?

B. How, if at all, would your answer to Part A above be different if the loan were a nonrecourse loan?

Discuss.