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G and L form a limited partnership. G, the general partner, contributes $20,000 and L, the limited partner, contributes $80,000. The partnership purchases equipment that will be leased to customers by paying $100,000 cash and a nonrecourse note for $400,000. The terms of the loan require only interest payment for the first three years. Assume that the equipment is depreciable over 10 years using the straight line method. The partnership agreement contains a QIO and the general partner is required to make up any deficit. Assume that income equals expenses except for depreciation. Cost recovery deductions are allocated 100% to L. All other profits and losses are allocated 20% to G and 80% to L. Nonrecourse deductions and nonrecourse liabilities are allocated according to profit sharing rations. All other requirement of Sec 704(b) are satisfied. a. Allocate minimum gain to the partners for the first three years. b. Allocate the cost recovery deductions to the capital accounts for the first three years and determine the capital account balance at the end of each year. c. Determine the outside basis of each partner at the end of each of the first three years after the nonrecourse liabilities and cost recovery deductions are allocated to the partners.

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