7b2a 800 nrl 400 cost recovery traditional method 2

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7B.(2)(a): $800 NRL, $400 Cost Recovery: Traditional Method (2) Allocate $800 Nonrecourse Debt: (a) Assume the partnership used the traditional method. Under the traditional method, if the property were disposed of immediately after its contribution for no consideration other than the $800 nonrecourse liability ABC would recognize a book loss of $200 ($800,000 NRL - $1,000 BV) and a taxable gain of $200 ($800 NRL - $600 AB). 42
7B.(2)(a): $800 NRL, $400 Cost Recovery: Traditional Method cont’d (2) Allocate $800 Nonrecourse Debt: (a) Assume the partnership used the traditional method.
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7B.(2)(a): $800 NRL, $400 Cost Recovery: Traditional Method Tax Gain to A, Basis Increase & Book Loss to All Partners cont’d (2) Allocate $800 Nonrecourse Debt: (a) Assume the partnership used the traditional method. Allocate Tax Gain to A but allocate book loss to all partners: B’s initial $120 initial tax basis would be increased by $180 (the $180 determined by 30% reflecting his residual profits interest x $600 unallocated debt). But B will have a $60 book capital account ($120 initial capital account less 30% of $200 book loss). C’s $80 initial tax basis would be increased by $120 (the $120 determined by 20% reflecting his residual profits interest x $600 unallocated debt). But C will have a $40 book capital account ($80 initial capital account less 20% of the $200 book loss). 44
7B(2)(a): $800 NRL, Traditional Method: Summary—Debt Allocation & Basis Adjustment Allocate $800 Nonrecourse Debt: A B C Minimum Gain: -0- -0- -0- “704( c) gain”: 200 -0- -0- Profits %: 300 180 120 Total Allocation 500 180 120 Outside Basis: A B C Basis on Contribution: 600 120 80 Plus Debt Share: 500 180 120 Less Debt Relief: <800> -0- -0- Outside Basis: 300 300 200 *Minimum Gain? No. MG = Debt: $ 800 Book Val: – 1,000 $ -0- 704(c ) Gain? Yes. $800 NRL - $600 adjusted basis at date of contribution. 45
7B(2)(a): $800 NRL, Traditional Method: Summary Capital Accounts & Allocation of Book Losses Book Capital Accounts: A B C Initial C.A. on Contribution: $200 $120 $80 Less Book Loss: <100> <60> <40> Capital Account: $100 $ 60 $40 46
7B(2)(b): $800 NRL, Remedial Method (see Rev. Rul. 95-41) Tax Allocations to B & C to Account for Book Loss Recall the remedial method is a “notional” method of allocating built- in gain. This means that an allocation is made to one partner based on an ascribed book value and offset by allocations to other partners. If ABC adopted the remedial allocation method described in Treas. Reg. section 1.704-3(d), ABC would make a remedial allocation of $60 of tax loss to B in connection with the hypothetical sale to eliminate the $60 disparity between B's book and tax allocations (Book loss of <$60> and $-0- tax loss). ABC would be required to make a remedial allocation of $40 of tax loss to C in connection with the hypothetical sale to eliminate the $40 disparity between C's book and tax allocations (Book loss of <$40> and $-0- tax loss). 47

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