Don and Paul each contribute $50 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 on a recourse basis and buys a $1,000
building. The building generates $100 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 Don. 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.
Do the allocations have economic effect?
Would the answer to Question 6a change if Don and Paul form a limited
partnership with Paul serving as the general partner. Can anything be done to
prevent reallocation of the losses?
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