Fred and Manuel each contribue $100,000to the newly formed FM Partnership in exchange for a 50% interest. The partnership uses the available funds to acquire equipment costing $160,000 and to find current operating expenses. The partnership agreement provides that depreciation will ba allocated 95% to Fred and 5% Manuel. All other items of income and loss will be allocated equally between the partners. Upon liquidation of the partnership, will be distributed to the partners in accordance with a negative captial account must contribute cash in the amount of the negative balance to restore the capital account to $0. In it's first year, the partnership reported an ordinary loss (before depreciation of $40,000 and depreciation expense of $32,000. In its second year, operations broke even, and the partnership reported depreciation expense of $51,200. On the first day of the third year, the partnership sold the equipment for $120,000 and distributed the cash in accordance with the parnership agreement. The partnership was liquidated at the same time.

a. Calculate the partners' bases in their partnership interests at the end of the first and second year?

b. Calculate the parners' bases in their partnership interests after reflecting any gain or loss on disposal of the equipment?

c. How willpartnership cash balances be distributed on liquidation?

d. Does the allocation provide in the partnership agreement have economic effect?

e. What observation can make reguarding the value of a deduction to each patron?