Sean and Pat formed a general partnership to which Sean contributed $50,000 of cash and Pat contributed depreciable property with fair market value...

1.      Sean and Pat formed a general partnership to which Sean contributed $50,000 of cash and Pat contributed depreciable property with fair market value of $50,000 and a basis of $20,000. The property has a ten-year cost recovery period, of which 5 years are remaining on the contribution date; it is being depreciated under the straight-line method. The partnership agreement provides that Sean and Pat will share profits and losses equally. Each year the partnership recognizes $12,000 of gross income and no deductions other than the depreciation deductions on the contributed property.

a.      Assume the partnership applies the traditional method of making section 704(c) allocations.

i.                    How much depreciation will be allocated to Sean and Pat, respectively, for book and tax purposes in year 1?

Book Tax Book Tax Cash $50k $50k S $50k $50k Property $50k $20k P $50k $20k $100k $70k $100k $70k

ii.                  At the end of year 5, what are Sean and Pat's tax and book capital accounts? (Be sure to take the $12,000 annual partnership gross income into account.)

b.      Assume alternatively the partnership applies the remedial method of making section 704(c) allocations.

i.                    What are Sean and Pat's tax and book capital accounts at the end of year 1?