Problem 1. The AJ partnership agreement satisfies the three basic requirements of the economic effect test of Reg. 1.704-1(b)(2)(ii)(b). The AJ partnership owns a portfolio of municipal bonds and a AAA Corporate bond with a variable rate of interest. At the beginning of last year, each investment had a value of $1,000 and each was expected to yield approximate income of $60. The partnership had net operating income from its business of $300 for the year. How will the tax exempt and taxable interest be allocated to the partners if the partnership agreement provides:

(b) Amber and Johnny share equally in operating income but the interest on the municipal bonds is allocated solely to Amber and the taxable interest is allocated solely to Johnny? Assume alternatively. Please provide a correct answer and a detailed explanation please? Thanks!