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determining his income tax, a partner must take into account his
"distributive share" of each item of partnership income, gain,
loss, deduction, and credit. Sec. 702. Each partner is taxed on
his distributive share of partnership income without regard to
whether the income is actually distributed to him. Sec. 1.702-
1(a), Income Tax Regs.
Section 704(a) provides the framework for the determination of
a partner's distributive share of partnership income, gain, loss,
deductions, or credits of the partnership. In general, the
partnership agreement determines a partner's distributive share of
these items. Sec. 704(a). These provisions provide a great deal
of flexibility to taxpayers who do business in the form of a
partnership. Partners have "great latitude in determining
themselves by their partnership agreement what their distributive
shares will be." Goldfine v. Commissioner, 80 T.C. 843, 849-850
(1983). However, the partners' ability to make special allocations
of partnership items is not unrestricted. The allocation of
partnership interests must have substantial economic effect. Sec.
704(b). Moreover, "if * * * the allocation to a partner under the
agreement of income, gain, loss, deduction, or credit (or item
thereof) does not have substantial economic effect", then the
partner's distributive share of these items "shall be determined in
accordance with the partner's interest in the partnership
(determined by taking into account all facts and circumstances)".
Sec. 704(b). Thus, in the absence of substantial economic effect,
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