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the Commissioner can reallocate partnership items in accordance
with the partners' interests in the partnership as determined under
section 1.704-1(b)(3), Income Tax Regs.
In the instant case, respondent determined that the allocation
of all of IHCL's income for the latter part of 1991 to THEI lacks
substantial economic effect and is not deemed to be in accordance
with THEI's interest in IHCL. Therefore, respondent reallocated 99
percent of IHCL's income for the period following June 20, 1991, to
Mr. Manchester. Petitioner disputes this reallocation.
B. The Section 704 Regulations
The section 704(b) regulations describe in detail not only the
circumstances in which a partnership's allocations will have
"substantial economic effect" but also the manner of determining a
partner's "interest in the partnership".
1. Substantial Economic Effect
a. Basic Principles
To have substantial economic effect, the partnership
allocations must reflect the actual division of income or loss
among the partners when viewed from the standpoint of economic,
rather than tax, consequences. Goldfine v. Commissioner, supra at
851-852. To this end, the regulations provide that an allocation
has substantial economic effect, if, in the event there is an
economic benefit or burden that corresponds to an allocation, the
partner receiving that allocation receives the corresponding
benefit or burden. Sec. 1.704-1(b)(2)(ii), Income Tax Regs.
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