Which of the following is false?

A. An increase (decrease) in a partner’s share of partnership liabilities increases (decreases) the partner’s basis in its interest.

B. Partnership recourse liabilities are allocated among the partners in proportion to the “economic risk of loss” they bear with respect to such liabilities.

C. A new partner contributes, in exchange for a 50% partnership interest, a parcel of raw land worth $1,000,000 (basis $200,000;

mortgage $550,000). The partnership assumes the liability.

Assume that the partner bears the economic risk of loss for one half of the liability. The partner will recognize a gain of

$350,000 on the contribution.

D. For liability allocation purposes, a partnership is generally deemed to have assumed a nonrecourse liability that encumbers a contributed asset.

Basic facts for the following four questions:

On January 1, calendar-year, accrual-method partnership XYZ was formed (and began business) with the following partner contributions:

During the year XYZ purchased Equipment (a single item) for

$1,000,000, paying $200,000 in cash and borrowing $800,000 on a recourse note (principal due in three years; bears market rate of interest payable each December 31).

On December 31, XYZ’s balance sheet is:

Exclusive of the allocations of the recourse and nonrecourse liabilities, the partners’ bases in their interests on December 31 are:

If a partner has a deficit balance in its capital account at the time the partnership liquidates, state law requires the partner to make a sufficient capital contribution to bring the deficit to zero.

The partnership agreement specifies that Tier III allocations of nonrecourse liabilities are made using the following procedure:

first, any remaining post-Tier II § 704

(c) gain potential is allocated to the contributing partner and, second, any remaining liability is allocated among the partners in proportion to their profit-sharing ratios.