Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 13

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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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