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deficit capital account must restore the amount of the deficit
balance to the partnership. These three requirements are a
distillation of earlier case law in which this Court analyzed
whether partnership allocations possessed substantial economic
effect. See, e.g., Orrisch v. Commissioner, 55 T.C. 395, 403-404
(1970); Kresser v. Commissioner, 54 T.C. 1621 (1970).
With respect to the case before us, the parties agree that the
IHCL Restated Agreement complies with the first two requirements.
The agreement provides that the partners' capital accounts will be
properly maintained and that liquidation proceeds will go to the
partners in proportion to their positive capital accounts. With
respect to the third requirement, however, neither the IHCL
Restated Agreement, nor any of its amendments, include a provision
requiring the partners to restore any deficits in their capital
accounts to the partnership upon liquidation. Accordingly, it is
undisputed that the IHCL allocation at issue does not meet the
basic test of substantial economic effect.
(2) Alternative Test of Economic Effect
The regulations provide an alternative test of economic
effect--one which accommodates the existence of limited
partnerships. Limited partnership agreements usually provide
specific limits upon the amount the limited partners are required
to contribute to the partnership. These limits on liability,
however, are inconsistent with the requirement in the basic test
that upon liquidation each partner must agree to repay any deficit
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