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G and L form a limited partnership. G, the general partner, contributes $20,000 and L, the limited partner, contributes $80,000. The partnership purchases equipment that will be leased to customers by paying $100,000 cash and a nonrecourse note for $400,000. The terms of the loan require only interest payment for the first three years. Assume that the equipment is depreciable over 10 years using the straight line method. The partnership agreement contains a QIO and the general partner is required to make up any deficit. Assume that income equals expenses except for depreciation. Cost recovery and nonrecourse deductions are allocated 20% to G and 80% to L. Nonrecourse liabilities are allocated in accordance with the manner in which it is expected that the deductions attributable to those liabilities will be allocated. All other requirement of Sec 704(b) are satisfied. a. Allocate minimum gain to the partners for the first three years. b. Allocate the cost recovery deductions and the nonrecourse deductions to the capital accounts for the first three years and determine the capital account balance at the end of each year. c. Determine the outside basis of each partner at the end of each of the first three years after the nonrecourse liabilities and cost recovery and nonrecourse deductions are allocated to the partners.

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