gxpallsp.ppt - Partnership Operations Special Allocations Copyright 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 James Edward Maule

gxpallsp.ppt - Partnership Operations Special Allocations...

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Partnership Operations: Special Allocations © Copyright 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009 James Edward Maule Applicable to all slides in set Unauthorized copying, distribution, or use of these slides is a violation of the Academic Rules of the Villanova Graduate Tax Program.
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Essentially, there is a general rule and 5 exceptions. As a practical matter, one looks to see if an exception applies and resorts to general rule only if none of the exceptions apply. The general rule ( §704(a)): “... partner’s distributive share ... determined by the partnership agreement.” Exceptions: The substantial economic effect exception §704(b) The contributed property exception §704(c) Varying Interests §706(d) The “gift” partnership exception §704(e) The “nonpartner capacity” exception §707(a), (c) Partnership Allocations: Overview
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Unless the gift, contributed property, varying interests, or partner noncapacity exception applies, p’ship items of income, loss, gain, deduction, credit are allocated pursuant to the partnership agreement. §704(a) But if the allocation lacks substantial economic effect, it is disregarded and the item is allocated in accordance with the partner’s interest in p’ship §704(b)(2) If there is no allocation in agreement, the item is allocated in accordance with the partner’s interest in p’ship §704(b)(1) Special allocations: statutory construct
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Reg approach: is allocation valid? Allocation is valid if it meets one of these three: 1.704-1(b)(1)(i) Substantial economic effect 1.704-1(b)(2) In accordance with interests in p’ship 1.704-1(b)(3) Deemed to have substantial economic effect 1.704-1(b)(4) Reg structure 1.704-1 (exc. for one rule in 1.704-2) [hereafter -1, -2] complexity and difficulties depth of subdivision via use of -1 and not -1 thru -n internal cross reference by long cite & not name layout/white space/margination Special allocations: regulatory construct
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(i) 2-prong definition (substantial economic effect requires economic effect & substantiality)! (ii) Economic effect (a) Concept: tax allocation of item to partner who bears actual economic burden or gets actual economic benefit (b) 3-prong mechanical test: (1) capital accounts properly maintained (per rules in -1(b)(2)(iv)) Special allocations: reg construct -1(b)(2) (2) liquidations set to follow capital accounts (3) obligation to restore deficits in capital accounts . . . . . . (e) allocation can have partial economic effect ( iv) Capital Account Accounting Rules (next slide)
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Special allocations: reg construct -1(b)(2) (ct’d) First, need to understand basics of capital account accounting Capital account is increased by money contributed FMV of property contributed income and gain allocated to partner Capital account is decreased by money distributed FMV of property distributed loss and deduction allocated to partner Note: FMV, not AB, of contributed/distributed property Unaffected by share of partnership liabilities Capital account can be negative Hence, ABPI usually not the same as capital acct So what does this mean?
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  • Spring '14
  • JamesE.Maule
  • Economic system, partner, Call-sign allocation plan, Capital accounts

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