D alternate test qio e allocation can have partial

(d) Alternate test (QIO)
(e) allocation can have partial economic effect
. . . . . .
(i) economic effect equivalence
(iii) Substantiality
(a) General rule
( iv) Capital Account Accounting Rules

Special allocations: reg construct -1(b)(2) (ct’d)
Substantiality: general rule
•
Regs: “An economic effect is substantial if there is a
reasonable possibility that the allocation … will affect
substantially the dollar amounts received by the partners
from the partnership aside from tax consequences . . .”
•
Nonetheless, allocation is not substantial if at time
allocation is agreed to, present value of one partner's
after-tax consequences are enhanced compared to
consequences in absence of allocation and there is a
strong likelihood that no partner’s after-tax economic
consequences, in present value terms, will be
substantially diminished compared to consequences
in absence of allocation
•
Take into account tax consequences resulting from
interaction of allocations with partner's tax attributes
unrelated to the partnership
Note pragmatic anomaly (and de minimis rule)

Special allocations: reg construct -1(b)(2) (ct’d)
(i) 2-prong definition
(ii) Economic effect
(a) Concept
(b) 3-prong mechanical test:
(1) capital accounts properly maintained
(2) liquidations set to follow capital accounts
(3) obligation to restore deficits in capital accounts
. . . . . .
(d) Alternate test (QIO)
(e) allocation can have partial economic effect
. . . . . .
(i) economic effect equivalence
(iii) Substantiality
(a) General rule
(b) Shifting allocations
( iv) Capital Account Accounting Rules

Special allocations: reg construct -1(b)(2) (ct’d)
Substantiality: shifting consequences
•
Economic effect is not substantial if at time allocation is
agreed to, there is a strong likelihood that:
•
net increases and decreases to capital accounts will
not differ substantially from the net increases and
decreases that would have been made in absence of
the allocation, and
•
the total tax liabilities of the partners are less than
they would have been in absence of the allocation
•
If at end of year, this does occur, then it is rebuttably
presumed that a strong likelihood of its occurrence
existed at the time the allocation was agreed to

Special allocations: reg construct -1(b)(2) (ct’d)
Substantiality: shifting consequences
E.G.
AB P’SHIP
Agreement
1. Meets 3-prong test
2. Allocate all tax-exempt interest to A
3. Allocate all taxable interest to B
Information from partners:
A in high marginal bracket
B in low marginal bracket
At time they enter into agreement, strong likelihood each type
of interest will be $5,000