Reference no: EM132668543

Mary and Carol each contribute $50,000 to their newly formed general partnership (each partner is required to restore any deficit in the partner's capital account upon liquidation of the partnership). The partnership borrows $900,000 on a non-recourse basis and buys a $1,000,000 building. The building generates $100,000 of depreciation a year for ten years, and the partnership has no other items of income or loss. The partners agree to allocate all losses equally until their capital accounts are zero; after that the partnership specially allocates all losses to Mary. Assume that capital accounts are maintained in accordance with the rules in Regulations §1.704-1(b)(2)(iv) and that liquidating distributions are to be made in accordance with positive capital account balances.

Problem 1: Do the allocations have economic effect in years 1, 2 and 3?