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partnership increases the partner’s capital account, the
allocation cannot have economic effect because the
minimum gain merely offsets nonrecourse deductions
previously claimed by the partnership and does not
necessarily bear any relationship to the value of
partnership property. Thus, minimum gain that is
attributable to nonrecourse deductions claimed by the
partnership must be allocated to the partners that were
allocated such nonrecourse deductions to prevent such
gain from impairing the economic effect of other
partnership allocations. * * * [Id.]
The regulations thus implement the Tufts doctrine that
deductions based on nonrecourse financing will later be offset by
increased income, even though that income is not realized in an
economic sense. Here, IHCL had passed through nonrecourse
deductions to its partners. The regulations require that a
subsequent deemed liquidation of IHCL generates gains, albeit
noncash, to offset previously claimed deductions. Those gains
increase the upper tier partners’ capital accounts pro tanto.
Respondent’s insistence that a deemed liquidation must produce
actual economic gains to offset nonrecourse deductions is
inconsistent with the logic of Tufts.
Other provisions of the regulations do not mandate a different
result. Respondent refers to language of section 1.704-
1T(b)(4)(iv)(e)(2), Temporary Income Tax Regs., 53 Fed. Reg. 53163
(Dec. 30, 1988), to the effect that if there is a net decrease in
partnership minimum gain, then each partner “must be allocated
items of income and gain for such year (and, if necessary, for
subsequent years)”. Respondent argues the parenthetical language
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