Bryan and Cody each contributed $120,000 to the newly formed BC Partnership in exchange for a 50% interest. The partnership used theavailable funds to acquire equipment costing $200,000 and to fund current operating expenses. The partnership agreement provides thatdepreciation will be allocated 80% to Bryan and 20% to Cody. All other items of income and loss will be allocated equally between thepartners.Upon liquidation of the partnership, property will be distributed to the partners in accordance with their § 704(b) book capital accountbalances. Any partner with a negative capital account must contribute cash in the amount of the negative balance to restore the capitalaccount to $0.In its first year, the partnership reported an ordinary loss (before depreciation) of $80,000 and depreciation expense of $36,000. In itssecond year, the partnership reported $40,000 of income from operations (before depreciation), and it reported depreciation expense of$57,600.a. Calculate the partners' bases in their partnership interests at the end of the first and second tax years.Bryan's BasisCody's BasisCapital contribution-Year 1Loss allocation-Year 1Depreciation allocation-Year 1Basis at the end of Year 1Income allocation-Year 2Depreciation allocation-Year 2Basis at the end of Year 2sa va a cabeza a ca$$$120,000 ✓40,00028,800 ✓51,200 ✓20,000 ✓46,080 ✓25,120✓120,000 ✓40,0007,200 ✔72,800✓20,000 ✓11,520 ✓81,280✓ b. Does the allocation provided in the partnership agreement have an "economic effect"?, because (1) gains, income, loss, and other allocations aredistributions are in accordance with endingYesreflected in capital account balances; (2) liquidatingcapital account balances; and (3) deficit capital accountsmust be restored.c. Now assume that on the first day of the third tax year, the partnership sells the equipment for $150,000. The gain on the sale isallocated equally to the partners. The partnership distributes all cash in accordance with the partners' capital account balances, and thepartnership liquidates. How will partnership cash balances be distributed to the partners upon liquidation? (Hint: First, calculate thepartners' bases in their partnership interests after reflecting any gain or loss on disposal of the equipment. Disregard any depreciation inyear 3.) What observations can you make regarding the value of a deduction to each partner?The realized gainon the sale of the equipment is $The partners' bases in their partnership interests after reflecting any gain or loss on disposal of the equipment: Bryan's basis is, and Cody's basis isWhat observations can you make regarding the value of a deduction to each partner?Bryan will receive $46,920 of the sales proceeds.Cody will receive $103,080 of the sales proceeds.Bryan has directly reducedhis right to cash flows on liquidation in favor of current deductions from taxable incomeAbsent the special allocation of depreciation, the parties each would have received $on the distribution of sale proceeds.Therefore, the economic effect rules ensure that a deduction reflects a true economic consequenceto the partner.

Question

Bryan and Cody each contributed $120,000 to the newly formed BC Partnership in exchange for a 50% interest. The partnership used theavailable funds to acquire equipment costing $200,000 and to fund current operating expenses. The partnership agreement provides thatdepreciation will be allocated 80% to Bryan and 20% to Cody. All other items of income and loss will be allocated equally between thepartners.Upon liquidation of the partnership, property will be distributed to the partners in accordance with their § 704(b) book capital accountbalances. Any partner with a negative capital account must contribute cash in the amount of the negative balance to restore the capitalaccount to $0.In its first year, the partnership reported an ordinary loss (before depreciation) of $80,000 and depreciation expense of $36,000. In itssecond year, the partnership reported $40,000 of income from operations (before depreciation), and it reported depreciation expense of$57,600.a. Calculate the partners' bases in their partnership interests at the end of the first and second tax years.Bryan's BasisCody's BasisCapital contribution-Year 1Loss allocation-Year 1Depreciation allocation-Year 1Basis at the end of Year 1Income allocation-Year 2Depreciation allocation-Year 2Basis at the end of Year 2sa va a cabeza a ca$$$120,000 ✓40,00028,800 ✓51,200 ✓20,000 ✓46,080 ✓25,120✓120,000 ✓40,0007,200 ✔72,800✓20,000 ✓11,520 ✓81,280✓ b. Does the allocation provided in the partnership agreement have an &#34;economic effect&#34;?, because (1) gains, income, loss, and other allocations aredistributions are in accordance with endingYesreflected in capital account balances; (2) liquidatingcapital account balances; and (3) deficit capital accountsmust be restored.c. Now assume that on the first day of the third tax year, the partnership sells the equipment for $150,000. The gain on the sale isallocated equally to the partners. The partnership distributes all cash in accordance with the partners' capital account balances, and thepartnership liquidates. How will partnership cash balances be distributed to the partners upon liquidation? (Hint: First, calculate thepartners' bases in their partnership interests after reflecting any gain or loss on disposal of the equipment. Disregard any depreciation inyear 3.) What observations can you make regarding the value of a deduction to each partner?The realized gainon the sale of the equipment is $The partners' bases in their partnership interests after reflecting any gain or loss on disposal of the equipment: Bryan's basis is, and Cody's basis isWhat observations can you make regarding the value of a deduction to each partner?Bryan will receive $46,920 of the sales proceeds.Cody will receive $103,080 of the sales proceeds.Bryan has directly reducedhis right to cash flows on liquidation in favor of current deductions from taxable incomeAbsent the special allocation of depreciation, the parties each would have received $on the distribution of sale proceeds.Therefore, the economic effect rules ensure that a deduction reflects a true economic consequenceto the partner.

Accepted Answer

A partnership is a form of commercial organization in which two or more people or organizations work…