Jim and Marta Created the JM Partnership by Contributing $60,000

question 50

Multiple Choice

Jim and Marta created the JM Partnership by contributing $60,000 each.The $120,000 cash was used by the partnership to acquire a depreciable asset.The partnership agreement provides that the partners' capital accounts will be maintained in accordance with Reg.§ 1.704-1(b) (the "economic effect" Regulations) and that any partner with a deficit capital account will be required to restore that capital account when the partner's interest is liquidated.The partnership agreement provides that MACRS will be allocated 10% to Jim and 90% to Marta.All other items of partnership income,gain,loss,deduction,and credit will be allocated equally between the partners.If the first year MACRS is $20,000 and no other operating transactions occur,which of the following statements satisfies the economic effect test of the Regulations?

• A)If the property is sold at the end of the year for $100,000 and the partnership is liquidated immediately thereafter, cash will be distributed $58,000 to Jim and $42,000 to Marta.
• B)Because each partner's profit and loss sharing ratio is 50%, a sale of the property for $108,000 at the end of the year, followed by an immediate liquidation of the partnership, will result in both partners receiving $54,000 cash.
• C)MACRS cannot be allocated to the partners in a 90/10 ratio since Regulations require that the allocation of MACRS must follow the relative capital contributions of the partners. Therefore, MACRS must be allocated equally between Jim and Marta.
• D)If the property is sold at the end of the first year for $120,000 and the partnership liquidated immediately thereafter, $60,000 cash would be distributed each to Jim and to Marta.
• E)None of the above.

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