1. Q and R form the QR partnership, each contributing $30,000. During its first year of operation, the partnership lost $10,000. Q and R agree that the loss should be allocated to R. What requirements must be met for the allocation to have economic effect? What are the tax and capital account effects of the allocation?
2. A and B form the AB partnership with cash contributions of $50,000 each. Each partner has a one-half interest in the capital, profit, and losses. The partnership purchases an apartment building for $100,000 on January 1, year 1. A wishes to shelter income form nonpartnership activities, so the partnership agreement allocates to her the entire depreciation deduction of $5,000 per year. The partners agree to reflect the depreciation allocation by appropriately adjusting A's capital account and to distribute proceeds on liquidation in accordance with their capital accounts. Assume that other expenses exactly equal income. What cash would be distributed to the partners on January 1, year 4 if the property is sold alternatively for $85,000, $100,000, and $70,000 and if the partnership subsequently liquidated? Does the allocation possess economic effect?

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Requirements for Allocation to Have Economic Effect In order for the allocation of the 10000 loss to ... View the full answer