QUESTION 4 Preliminary Question: A and B, calendar year individuals, are partner
ID: 2332518 • Letter: Q
Question
QUESTION 4
Preliminary Question:
A and B, calendar year individuals, are partners in the AB general partnership to which they each contributed $100 cash. Their interests under the partnership agreement are as follows:
A’s percentages
B’s percentages
Capital
50
50
Profits
60
40
Losses
30
70
Capital accounts (including deficit restoration obligations) will be followed in making all distributions, both current and liquidating.
During the first year of operations, AB loses $100. In the second year of operations, AB loses $100. In the third year of operations, AB has $200 of net income. Please prepare a balance sheet that reflects the situation at the end of each of the three years of operation.
How would AB allocate profits and losses for the first three years of operations?
If AB were to liquidate at the end, alternatively, of each of the first three years of operations, who would receive what?
What if, in June of Year 3, when it looks as though AB will earn about $200, A and B amend the partnership agreement to adjust their profit shares for Year 3 only: A goes from 60% to 30%; B goes from 40% to 70%. What effect might that have on your conclusions about the allocation of tax losses in years 1 and 2 and the allocation of bottom line income in Year 3?
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QUESTION 5
G and L organize the GL partnership. Each contributes $50 for his partnership interest. The partnership purchases an apartment building for $1,000, making a $100 down payment and paying the remainder of the price with a mortgage loan. The principal of the mortgage loan is payable in a single payment after 12 years. The gross income and deductions of the partnership for each of the first few years are expected to be as follows:
Rent
Cash operating expenses
$150
$240
Interest expense
90
Depreciation expense
50
( $290)
Loss
($ 50)
The partnership agreement allocates all depreciation deductions to L. All other gross income and deductions are allocated to the partners equally.
The partnership agreement provides that all income, gains, losses and deductions will be reflected in the partners' capital accounts (which will be maintained in accordance with Reg. § 1.704-1(b)(2)(iv)); and each partner will be entitled on liquidation (of either the partnership or the partner's interest) to distribution of an amount equal to his positive capital account balance.
Assume that the partnership operates for two years, and then sells the building at the beginning of year 3 for, alternatively, $1,100 or $800. How will the partnership's income, gain, loss and deduction (including depreciation deductions) be allocated between G and L, and will the allocations be respected for federal income tax purposes, in the following alternative variations?
(a) The partnership is a general partnership, the mortgage lender has full recourse against the partnership and the partners, and any partner having a deficit in his capital account when either the partnership or his interest is liquidated must then make an additional capital contribution equal to that deficit.
b) The partnership is a limited partnership with G as the general partner and L as the limited partner; the mortgage loan is recourse; and the partnership agreement says nothing about capital account deficit restoration on liquidation of a partner'sinterest.
Same as (b), except L is obligated to restore any deficit in his capital account to the extent that it does not exceed $50, and there is a "QIO" provision [within the meaning of Reg. § 1.704-1(b)(2)(ii)(d)] in the partnership agreement.
Would the year 2 allocations have economic effect or alternate economic effect if: (1) as of the end of year 2 of operations, the partnership plans in year 3 to borrow $60 on a recourse basis and distribute the cash proceeds of the loan equally to G and L, and (2)the partnership reasonably expects to earn $60 net income in year 3?
What if, in year 3, the partnership borrows $60 and distributes $30 to each of G and L as planned, but unexpectedly earns only $40 (net income)?
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A’s percentages
B’s percentages
Capital
50
50
Profits
60
40
Losses
30
70
Explanation / Answer
Question - 4
AB, Firm will allocate profit and loss in first three years of operations in a Loss Sharing Ratio as per agreement. In a ratio A:30% & B:70%
In a year 3, Profit sharing Ratio has been changed from A : 60% & B : 40% to A : 30% & B : 70%.
For Year - 1 Loss of $ 100 & Year - 2 Loss of $ 100 is to be allocated in 30:70 ratio
that is for
Year - 1
Loss : A = $ 30 & B = $ 70
Year - 2
Loss : A = $ 30 & B = $ 70
For Year 3 Profit of $ 200 is to be allocated in A:B = 30:70 ratio
Profit : A = $ 60 & B = $ 140
No Balance has been left in Partners' account as Loss & profit has been set off each other.
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