Positive balances of the capital accounts

Posted: March 29th, 2022

 
Bill, Sam and Jim form an equal partnership BSJ by contributing $250,000 each. BSJ purchases machinery for $750,000. The machinery has a depreciable life of 10 years straight-line and all depreciation is allocated to Bill. Capital accounts are maintained in accordance with Sec. 704(b). Liquidations are made in accordance with the positive balances of the capital accounts of each partner. Partners are required to restore deficit capital accounts to zero upon liquidation. Income, not counting depreciation, is $100,000 per year.
a) Is the special allocation of depreciation valid in year 1? Why?
b) If the special allocation of depreciation were not valid, how would depreciation be allocated among the partners?
c) If the partnership were liquidated after year 3, how much would each partner get? Why?
d) If the partnership were liquidated after year 4, how much would each partner get? Why?