Chapter 5 Substantial Economic Effect Lecture

Chapter 5 Substantial Economic Effect Lecture - Partnership...

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Partnership Allocations Substantial Economic Effect
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Testing Partnership Allocations Allocations must be made in accordance with the partners’ interests in the partnership (PIP), or Have substantial economic effect (SEE). 2
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Substantial Economic Effect The substantial economic effect test is a two-part test: 1. An allocation must have economic effect 2. The economic effect must be substantial 3
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Determining Economic Effect 4
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Economic Effect Test Three alternative tests to meet economic effect: 1. Primary test 2. Alternate test 3. Economic Equivalence test (dumb but lucky rule) 5
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Primary Test for Economic Effect 1. The partners must maintain their capital accounts in accordance with the capital account maintenance rules of Treas. Reg. §1.704-1(b)(iv). 2. Liquidating distributions must be made in accordance with positive capital account balances. 3. Upon liquidation, a partner with a deficit in his capital account must restore the negative balance (DRO). 6
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Test The alternative economic effect test is the same as the primary test but modifies the third test, the deficit restoration obligation. Qualified Income Offset (QIO) Unexpected deficits will result in allocations of income from the partnership to restore as quickly as possible. 7
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This note was uploaded on 03/20/2012 for the course ACCT 6354 taught by Professor Will during the Fall '11 term at University of Texas at Dallas, Richardson.

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Chapter 5 Substantial Economic Effect Lecture - Partnership...

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