G and L form a limited partnership. L contributes $2,000, and G, who does not contribute cash, will use her immense brainpower to earn money for the partnership. The business deal is that L receives all cash distributions until L has received back the amount of her capital investment. Subsequent distributions will be split 80% to L and 20% to G.
In Year 1, the partnership buys two parcels of land, Black acre and Whitacre, each for $1000. At year end, the partnership sells Black acre for $1100 and distributes the entire proceeds of $100 to L. How should the $100 gain on Black acre be allocated between L and G to be consistent with the business deal?
suppose in #4 that the business deal is that L is to receive all cash distributions until L received an amount equal to her capital investment, plus a preferred return of 4% annually on that investment (until distributed), before any cash is distributed to G. The partnership’s cash flow distributions provisions (i.e., “the waterfall”) provide that
L is entitled to distributions in the amount of her initial contribution of $2000,
L is entitled to distributions equal to her accumulated preferred return,
G is entitled to her “catch-up”, a distribution equal to 20 of the sums of (ii) and (iii), and
The balance, if any, is to be distributed 80:20 between L and G.
How should the $100 gain on Black acre be allocated?
Further question: In year 2, the partnership continues to hold Whitacre, but does not otherwise engage in any tax significant transactions. How should the partnership consider L’s 4% preferred return?
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