-18-
income and gain, to a partner who has an unexpected negative
capital account, either as a result of partnership operations or as
a result of making the adjustment for reasonably expected
reductions. The QIO must operate "in an amount and manner
sufficient to eliminate such deficit balance as quickly as
possible." Sec. 1.704-1(b)(2)(ii)(d), flush language, Income Tax
Regs.
In the present case, neither the IHCL Original Agreement nor
the IHCL Restated Agreement contains a provision requiring capital
account adjustments for reasonably expected distributions or a
"qualified income offset". To be sure, the second amendment to the
IHCL Restated Agreement does provide for a net income allocation to
pay off THEI's deficit capital account. However, the second
amendment falls short of the requirements for a QIO. The second
amendment allocates only net income, not "a pro rata portion of
each item of partnership income", allocated "in an amount and
manner sufficient to eliminate such deficit balance as quickly as
possible." Sec. 1.704-1(b)(2)(ii)(d), Income Tax Regs. Thus, the
second amendment was not designed to provide a prompt repayment of
unforeseen negative capital accounts. Rather, the partners are
permitted to accumulate very large deficit accounts over a number
of years. Petitioner does not seriously argue otherwise.
Consequently, the IHCL partnership allocations fail to meet the
alternative test of economic effect.
Page: Previous 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 NextLast modified: May 25, 2011