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economic effect, it will be deemed to have economic effect even if
it does not otherwise meet the formal requirements of the basic
test.
In the present case, neither party maintains that the special
allocations in this complex multitiered partnership situation would
have the equivalent economic effect of meeting the basic test.
(4) Conclusion
The special allocation of 100 percent of IHCL’s net income for
1991 to THEI does not have substantial economic effect.
Partners’ Interests in the Partnership
(1) 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
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.
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