-14-
Additionally, the economic effect of the allocation must be
substantial; this requires "a reasonable possibility that the
allocation (or allocations) will affect substantially the dollar
amounts to be received by the partners from the partnership,
independent of tax consequences." Sec. 1.704-1(b)(2)(iii)(a),
Income Tax Regs.
b. Capital Accounts
Determinations of substantial economic effect, as well as
determinations of a partner's interest in the partnership, depend
upon an analysis of the partners' capital accounts. Generally
speaking, a partner's capital account represents the partner's
equity investment in the partnership. The capital account balance
is determined by adding (1) the amount of money that the partner
contributes to the partnership, (2) the fair market value of
property the partner contributes (net of liabilities to which the
property is subject or which are assumed by the partnership), and
(3) any allocations of partnership income or gain. A partner's
capital account is decreased, however, by the amount of money that
the partnership distributes to the partner, and by the amount of
any allocation to such partner of losses and deductions. The
capital account is also reduced by the fair market value of
property distributed to the partner, net of any liability that the
partner assumes, or to which the property is subject. Sec. 1.704-
1(b)(2)(iv), Income Tax Regs.
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