Question

Bryan and Cody each contributed $120,000 to the newly formed BC Partnership in exchange for a 50% interest. The partnership used the available funds to acquire equipment costing $200,000 and to fund current operating expenses. The partnership agreement provides that depreciation will be allocated 80% to Bryan and 20% to Cody. All other items of income and loss will be allocated equally between the partners. Upon liquidation of the partnership, property will be distributed to the partners in accordance with their capital account balances. Any partner with a negative capital account must contribute cash in the amount of the negative balance to restore the capital account to $0. In its first year, the partnership reported an ordinary loss (before depreciation) of $80,000 and depreciation expense of $36,000. In its second year, the partnership reported $40,000 of income from operations (before depreciation), and it reported depreciation expense of $57,600. On the first day of the third tax year, the partnership sold the equipment for $150,000. The gain on the sale is allocated equally to the partners. The partnership distributes all cash in accordance with the partners' capital account balances, and the partnership liquidates.

a. Calculate the partners' bases in their partnership interests after reflecting any gain or loss on disposal of the equipment. Disregard any depreciation in year 3. The realized gain on the sale of the equipment is $_______. The partners' bases in their partnership interests after reflecting any gain or loss on disposal of the equipment: Bryan's basis is $___________, and Cody's basis is $______________.

(Precontribution gain or loss must be allocated among the partners to take into account the variation between the basis of the property and its fair market value on the date of contribution. The partnership keeps track of these differences in its "§ 704(b) book" accounting records.)

b. Complete the computation below for each partner regarding the distribution of cash balances upon liquidation. Bryan will receive: $______ Cody will receive: $_______

c. Bryan has directly reduced his right to cash flows on liquidation in favor of current deductions from taxable income . Absent the special allocation of depreciation, the parties would each have received $________ on the distribution of sale proceeds. Therefore, the economic effect rules ensure that a deduction reflects a true economic consequence to the partner.

Answer 1