G and L form a limited partnership. G, the general partner, contributes $80,000 and L, the limited partner, contributes $320,000. The partnership purchases commercial real estate on leased land, paying $4000,000 cash and borrowing $1,600,000 on a nonrecourse basis from a commercial lender. The terms of the loan require payment of interest only for the first five years. The GL partnership agreement allocates all income, gain, loss, and deductions 20% to G and 80% to L until the first time that the partnership has recognized items of income and gain that exceed the items of loss and deduction recognized over its life, and then all further partnership items are to be allocated equally between G and L. At the time the partnership agreement is entered into, there is a reasonable likelihood that, over the partnership's life, it will recognize amounts of income and gain significantly in excess of losses and deductions. The partnership agreement requires that all allocations are to be reflected in appropriate adjustments to the partners' capital accounts and liquidation proceeds are to be distributed in accordance with positive capital account balances. Only G is required to restore a capital account deficit. The partnership agreement contains a qualified income offset for L and a minimum gain chargeback provision. Finally, the agreement provides that all nonliquidating distributions will be made 20% to G and 80% to L until a total of $400,000 has been distributed, and thereafter such distributions will be made equally to G and L. The partnership depreciates its property using the straight-line method over a valid (you may assume) 10-year recovery period.

a) Assume that rental income from the property of $150,000 equals operating expenses (including interest on the nonrecourse debt) of $150,000. Determine the allocation of the partnership's cost recovery deductions in each of the first three years of operations and determine the partners' capital accounts at the end of each year. Remember to allocate the $1,600,000 liability between the partners according to their profits interests and to adjust their outside bases accordingly.

b) Same as (a), above, except the partnership agreement provides that L will be allocated 99% and G 1% of all the partnership's cost recovery deductions. Remember that whenever a partner's capital account will become a deficit because of an allocation, he must either have an enforceable DRO in place or be subject to a minimum gain chargeback provision. Remember too that allocations of nonrecourse deductions must be "reasonably consistent" with the allocation of other items.

c) Same as (a), above, except that the partnership agreement provides that L will be allocated 70% and G 30% of all the partnership nonrecourse deductions.

d) Is there an allocation under the minimum gain chargeback in (a), above, if at the end of the year four G contributes $80,000 and L contributes $320,000 to the partnership, which uses the funds to pay down $400,000 of the liability? Remember that a net decrease in partnership minimum gain can occur when the debt itself decreases.

e) Is there an allocation under the minimum gain chargeback in (a), above, if during year four the partnership converts $600,000 of the $1,600,000 nonrecourse liability to a recourse liability? Determine the partners' capital accounts at the end of years four and five. Remember that a general partner will usually bear the whole economic risk of loss for a recourse liability.

f) What results under the facts of (a), above, in year four if in that year, when the property has appreciated in value, the partnership incurs an additional $300,000 in nonrecourse liability and it distributes the proceeds $60,000 to G and $240,000 to L? The purpose of the minimum gain chargeback is to allow deficits only when the partner is subject to a chargeback provision. Remember that the distribution of cash will reduce capital and possibly cause a deficit.