Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 19

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                              (3)  Economic Equivalence Test                          
               There is another economic effect "safe harbor" (which is of            
          limited application), referred to as the "economic equivalence              
          test". Section 1.704-1(b)(2)(ii)(i), Income Tax Regs., provides             
          that, in the event that an allocation would produce the economic            
          equivalent of meeting the basic test for economic effect, it will           
          be deemed to have economic effect even if it does not otherwise             
          meet the formal requirements of the basic test. This economic               
          equivalence test is likely to be met only by the least complicated          
          partnerships.  Here, neither party maintains that the allocations           
          in this complex multitiered partnership situation would have the            
          equivalent economic effect of meeting the basic test.  To the               
          contrary, the existence of large deficit capital accounts with no           
          obligation to repay would appear to preclude the meeting of that            
          test here.  Thus, the IHCL partnership fails to meet this "safe             
          harbor" test.                                                               
                    2.  Partners' Interests in the Partnership                        
                         The General Rule                                             
               Section 704(b) provides that an allocation of partnership              
          income, gain, loss, deductions, or credit (or item thereof) that            
          does not meet the requirements for substantial economic effect will         
          be "determined in accordance with the partner's interest in the             
          partnership".  This requirement, although less specific than the            
          test for economic effect, nevertheless requires that partnership            
          allocations be analyzed on the basis of their actual economic               




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