Problem
T and K formed new partnership TK to operate a charter boat service in Florida. T contributed a boat with a tax basis of $210,000 and a fair market value of $350,000. K contributed $350,000 cash. The partnership agreement allocates profits, losses, and capital 50% to each partner. The agreement satisfies the requirements of Code Sec. 704(b).
1. Assume the fishing boat is depreciated using the straight-line method over 7 years. Further assume that the partnership deducts a half-year of depreciation expense in its first year of operations. How will year 1 book and tax depreciation be allocated between the partners?
2. Assume the partners agreed to dissolve the partnership at the end of year 1. The partnership sold the boat for $400,000 and liquidated. How much gain will it recognize on sale of the boat for book and tax? How will this gain be allocated between the partners?