James and Kendis Created the JK Partnership by Contributing $60,000

question 70

Essay

James and Kendis created the JK 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 James and 90% to Kendis. All other items of partnership income, gain, loss, deduction, and credit will be allocated equally between the partners. In the first year, MACRS is $20,000 and no other operating transactions occur. The property is sold at the end of the year for $100,000 and the partnership is liquidated immediately thereafter.
To satisfy the economic effect test, how much of the $100,000 cash (from the sale) is allocated each to James and Kendis?

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Definitions:

Variances

The quantitative measure of the difference between actual and expected behavior, often used in finance to assess volatility of returns or tracking errors.

Covariances

An indicator of the extent to which two variables fluctuate in tandem.

Risky Securities

Financial instruments carrying a higher potential for loss, often offering greater potential returns to compensate for the increased risk.

Portfolio Variance

A measure of the dispersion of returns of a portfolio, calculated as the weighted average of the covariance of each asset in the portfolio.