Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 20

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          impact.  Accordingly, the regulations provide that an examination           
          of a partner's interest in the partnership "shall be made by taking         
          into account all facts and circumstances relating to the economic           
          arrangement of the partners."  Sec. 1.704-1(b)(3)(i), Income Tax            
          Regs.  There is, however, a specific provision in the regulations           
          on which petitioner and respondent both rely to demonstrate the             
          correctness of their respective positions in this case.  To this            
          provision we now turn.                                                      
                    3.  Special Rules for Determining Partners' Interests             
               The "partners' interest" regulations contain a special                 
          provision for "certain determinations" in ascertaining the                  
          partner's interest in the partnership. This special provision               
          applies only when a partnership's allocations lack economic effect          
          under section 1.704-1(b)(2)(ii), Income Tax Regs.  To satisfy this          
          special provision, the partnership agreement must meet the first            
          two parts of the basic test for economic effect. That is, the               
          agreement must provide both that capital accounts are to be                 
          properly maintained and that liquidating distributions will be made         
          only to partners with positive capital accounts.  When these                
          conditions are met, the special provision may be applied to                 
          determine  whether  the  allocations  are  in  accordance  with             
          partnership interests.                                                      
               Under the special provision, a partner's interest is measured          
          by comparing the amount the partner would receive in a hypothetical         
          liquidation at the end of the current year with the amount the              




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