Allocated 40 percent of partnership losses to frank

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allocated 40 percent of partnership losses to Frank, who had claimed none, and 60 percent to John, who had claimed all of the losses. Thus, in Frank's Tax Court trial, the Service was in the peculiar position of trying to confer additional deductions on him over his objection. Both the Tax Court and the Fourth Circuit found the oral agreement invalid under § 704. Both courts then looked to state law to determine the partners' shares of losses, and found that, in the absence of an agreement, losses are shared in accordance with profits. Interpreting the Sellers's certificate somewhat freely as allocating profits in accordance with capital contributions (the portion of the certificate relied on only refers to allocations among limited partners ), both courts concluded that losses should be allocated in accordance with capital contributions. At this point, the Tax Court relegated the balance of the matter to computation under Rule 155. The Fourth Circuit lacked this luxury and was forced to analyze the partners' capital contributions. Frank, the general partner, had contributed rental properties offset by various personal debts for the avowed purpose of keeping his capital account negative so that all profits and losses would be allocated to John and his wife, the limited partners. Because it found no express or implied assumption of Frank's personal debts by the partnership and no economic purpose for such an assumption, the Fourth Circuit ignored the debts in computing the amount of Frank's capital contributions. Consequently, the court upheld the government's position and allocated 40 percent of the partnership's losses to Frank. Labrum & Doak, LLP v. Bechtle, 222 BR 749 (ED Pa. 1998) , aff'd, 2000 WL 1204646, 2000 U.S. District LEXIS 12066 (ED Pa. Aug. 22, 2000) , suggests that the entire partnership agreement as well as the partners' actions will determine the enforceability of allocations under local law. This case involved a law partnership that entered into a ten-year lease of office space. The lease provided substantial front-end inducements to the law firm in the form of more than two years of “free rent” during the first half of the lease term. The firm used the “constant rental accrual” method of accounting for its rent expense under § 467. The effect of this accounting method was to produce rent expense deductions during the first half of the lease that were in excess of the actual rent payments (“phantom deductions”) and rent expenses during the second half of the lease that were less than the actual rent payments (“phantom income”). Partners began leaving the firm about four years after the lease commenced, and the remaining partners purported to amend the original partnership agreement under § 761(c) to allocate shares of phantom income to the departing partners to
2/14/2020 Checkpoint | Document 8/9 offset their prior shares of the phantom deductions. Thereafter, the firm went into dissolution

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