Please read and answer all the questions.

Course: Partnership Taxation: TAX-504-2108
Assignment: Assignment 4 (based on class 14)

A (a cash method taxpayer) is an equal partner in the ABCD partnership (an accrual method taxpayer).  A owns depreciable personal property (A/B = $2,000; FMV = $15,000; fair rental value = $1,000 per year) which the partnership will use in its business.  Before any of the transactions described below, the partnership has $8,000 of operating income and $2,000 of long-term capital gain each year.  What is the amount and character of A’s income in the first year in each of the following scenarios?

a) A leases the property to the partnership for three years.  The partnership will pay A $1,000 per year for three years for the use of the property.

b) What result in (a), above, if the rental payments are made on January 31 of the year following accrual? See Sections 267(a)(2) and 267(e).

c) A transfers the property to the partnership, which will use it for three years and transfer it back to A at the end of that period.  The partnership makes a special allocation of its first $1,000 of net income to A.  What result to A?  What if, instead, the first $3,000 of the first year’s net income and no subsequent income in excess of her one-quarter share is allocated to A?  Complete both the $1,000 allocation and the $3,000 allocation first as if Sec. 707(a)(2)(A) does not apply, then again as if it did.  Be sure to take into account the timing rules of Section 461(h).