(viii) Electing Large Partnerships Partner is reported items under § 772 and all passive losses are treated as being from a single activity and not separately reported. § 772(c)(2), but general partners must be separately reported items to comply with assive loss limitations § 772(f). (ix) Publicly Traded Partnerships For PTP taxed as partnerships because they exceed the 90% threshold, the pass through is treated as portfolio income. § 469(k). IV) Chapter 4. Partnership Allocations A) Introduction Greater flexibility in the partnership setting to tailor income, expense, distributions, compensation, etc. and reflects important and legitimate non-tax economic considerations. The IRC gives deference to the economic arrangements of partnerships, allowing special allocations under § 761(c) up until the filing of the return In order to prevent abuse of the system, partnerships are governed by a complex regulatory scheme and subject to adjustments for arrangements that lack economic substance. B) Special Allocations Under Section 704(b) 1) Background: The Substantial Economic Effect Concept (i) Orrisch v. Comm’r , 55 T.C. 395 (1970). (ii) Notes The “substantial economic effect” test used in the pre-1976 regulations was incorporated and codified into the current § 704(b), used for both allocation of items and bottom line allocations in the 1976 amendment. Congress made the change, believing that an overall allocation of taxable income should be subject to disallowance in the same manner as allocations of items If a partnership allocation is set aside, the allocation is determined by the partners’ interest in the partnership § 704(b) is short but the regulations promulgated thereunder are lengthy and complex 2) The Section 704(b) Regulations: Basic Rules (a) Introduction The two part test to be satisfied under the § 704(b) regulations is “economic effect” and “substantiality”, with economic effect being determined mechanically and substantiality being subjective but focuses on the dollar amounts to be received by partners aside from tax considerations. Treas. Reg. § 1.704-1(b)(2)(ii)(a); (iii)(a). In the absence of partnership allocations or lack of substantial economic effect, the partners’ interests in the partnership will be determinative, which is determined by taking into account all facts and circumstances. § 704(b); Treas. Reg. § 1.704-1(b) (3). The regulations apply to allocation of specific items and partnership income and loss (bottom line) allocations. Treas. Reg. § 1.704-1(b)(1)(vii).
The allocations must pass annual testing for substantial economic effect and part of an allocation may pass while another part fails. Treas. Reg. S 1.704-1(b)(5). (b) Maintenance of Partners’ Capital Accounts The reference point used in the regulations is the capital account balance, which essentially represents a partner’s equity in the partnership.
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- Limited partnership, Types of business entity, Taxation in the United States, partner