Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 15

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               Conceptually, if a partner has a positive capital account on           
          the date of liquidation, the partnership owes him that amount.  If,         
          however, the partner has a negative capital account on the date of          
          liquidation, the partner in theory owes that amount to the                  
          partnership--or, as a practical matter, to those partners having            
          positive capital accounts.                                                  
                         c.  The Three Tests of Economic Effect                       
               The regulations governing the economic effect of partnership           
          allocations contain three tests that in a sense serve as "safe              
          harbors". Partnership allocations are deemed to have economic               
          effect if they are made pursuant to a partnership agreement that            
          meets the requirements of any one of these tests.  An understanding         
          of how these tests operate helps to establish the background for            
          the parties' contrasting arguments.                                         
                              (1)  The Basic Test                                     
               The basic test for economic effect is set forth in the                 
          regulations. Section 1.704-1(b)(2)(ii)(b), Income Tax Regs.,                
          provides, in general, that an allocation will have economic effect          
          if the partnership agreement contains provisions that require: (1)          
          The determination and maintenance of the partners' capital accounts         
          are to be in accordance with the rules of section 1.704-                    
          1(b)(2)(iv), Income Tax Regs.; (2) upon liquidation of the                  
          partnership, the proceeds of liquidation are to be distributed in           
          accordance with the partners' positive capital account balances;            
          and (3) upon liquidation of the partnership, all partners having a          




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