On January 1 of the current year, Andy and Barney form a Partnership to invest in property. Andy contributes investment land that he acquired two years ago, and that has a fair market value of $100. Barney contributes $100 in cash. Each partner receives a 50% interest in the partnership's capital, profits, and losses.

Assets Liabilities & Capital

Book FMV

Cash $100 $100

Land $50 $100

Capital Accounts

Tax Book

Andy $50 $100

Barney $100 $100

(For purposes of this problem, assume that Andy’s basis in the land at the time he contributed it to the Partnership is $50. Begin this problem by setting up the Partnership’s Balance Sheet showing particular attention to tax and book capital and then show the relevant changes to tax and book capital in each part below.

(a) Under the "traditional method" of accounting for § 704(c) gain, how will the partnership allocate its gain or loss for book and tax purposes if the partnership sells the land for:

1. Assume the partnership invests Barney's cash in stock that appreciates and the partnership sells the stock at a tax and book gain of $30 in the same taxable year in which it sells the land. Would your answer to (a)(iii) above differ if the partnership used the "traditional method with curative allocations?" Yss

2. What if, in (b), the partnership does not sell the stock and, in fact, has no items of income, gain, loss or deduction in the year that the land is sold other than from the sale of the land: would your answer to (a)(iii) above differ if the partnership used the "traditional method with curative allocations?" Curative allocations have no impact on book allocations. Instead, they vary only the tax allocations to cancel out the ceiling rule problem and in doing so they violate the principle that tax must follow book.

( c) How would your answer to (a)(iii) differ if the partnership used the "remedial allocation method”?

Answer rating: 100% (QA)

a i If the partnership sells the land for 120 it will have a 20 gain ... View the full answer