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Q/ Allocations to Contributed Property using general rules & basic application of IRS 704(c)(1)(A)

Amy, Beth, and Charlene form ABC, LLC on January 1, 2013. Amy contributes depreciable property with a FMV of $400,000 subject to a nonrecourse loan of $200,000; the property has an adjusted tax basis of $250,000 and is depreciated straight line with 5 (five) years remaining. Beth contributes $500,000 cash and Charlene contributes $300,000 cash. No member agrees to a deficit restoration obligation.

The ABC operating agreement (i) provides for the maintenance of capital accounts, (ii) provides that distributions in liquidation will be made in accordance with such capital accounts, and (iii) contains a qualified income offset provision. Pursuant to the agreement, partnership taxable income and loss is allocated to the members in proportion to their book capital accounts except for depreciation expense which will all be allocated to Beth. In year 1 income equals expenses on a cash basis; the loss is equal to the amount of depreciation expense. No principal is paid down on the nonrecourse debt. At the beginning of year 2 (ignore any depreciation expense for year 2), the property is sold for $500,000; $200,000 of the proceeds are used to retire the nonrecourse loan and the remaining $300,000 is put in the bank. The operating agreement provides that the traditional method is to be used for any property with built-in gain.

A. What are Amy, Beth, and Charlenes book capital accounts at the end of Year 1?

B. What is Amy, Beth, and Charlenes tax basis in their partnership interests at the end of Year 1?

C. How is the book and tax gain (loss) allocated amongst Amy, Beth, and Charlene?

D. What are Amy, Beth, and Charlenes book capital accounts after the sale?

E. What is Amy, Beth, and Charlenes tax basis in their partnership interests after the sale?

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