L and M established the LM General Partnership on December 31 of the current year. The capital accounts are properly maintained under the 704 rules. The partnership agreement provides that L will be allocated 95% of the partnership income, gains, losses, deductions, and credits until he has been allocated income and gains equal to his previous allocation of losses and deductions. Thereafter, all partnership items will be allocated equally. Each partner contributed $40,000 cash to the partnership in exchange for his interest. The partnership used the $80,000 to purchase a parcel of land for $200,000. The other $120,000 was borrowed from a local bank as a loan to the partnership. The land is collateral for the loan and both partners are personally liable on it.

If the new liability-sharing rules are used, after the hypothetical liquidation, L’s capital account will be:

a.	a.  $40,000
b.	b.  0
c.	c.   <$$150,000>
d.	d.  $190,000
e.	e.  None of the above

 

How will the loan liability be shared between the partners for computing each partner’s basis in his partnership interest under the new liability-sharing rules if the new rules were to be used:

a.	a.  95% L, 5% M
b.	b.  50% L, 50% M
c.	c.   100% L, 0% M
d.	d.  None of the above

Answer rating: 100% (QA)

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