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Your clients, Mark Henderson and John Burton, each contributed $10,000 of cash to form the Realty Management Partnership, a limited partnership.
Your clients, Mark Henderson and John Burton, each contributed $10,000 of cash to form the Realty Management Partnership, a limited partnership. Mark is the general partner and John is the limited partner. The partnership used the $20,000 of cash to make a down payment on a building. The rest of the building’s $200,000 purchase price was financed with an interest-only nonrecourse loan of $180,000, which was obtained from an independent third-party bank. The partnership allocates all partnership items equally except for the MACRS deductions and building maintenance, which are allocated 70% to John and 30% to Mark. The partnership definitely wishes to satisfy the ‘‘economic effect’’ requirements of Reg. §§ 1.704–1 and 1.704–2 and will reallocate MACRS, if necessary, to satisfy the requirements of the Regulations.Under the partnership agreement, liquidation distributions will be paid in proportion to the partners’ positive capital account balances. Capital accounts are maintained as required in the Regulations. Mark has an unlimited obligation to restore his capital account while John is subject to a qualified income offset provision. Assume all partnership items, except for MACRS, will net to zero throughout the first three years of the partnership operations. Also, assume that each year’s MACRS deduction will be $10,000 (to simplify the calculations).*Please draft a tax memorandum to the partnership, evaluating the allocation of MACRS in each of the three years under Reg 1.704-1 and 1.704-2.
