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capital account of $2,877,802. Respondent then notes that section
1.704-1T(b)(4)(iv)(e)(2), Temporary Income Tax Regs. requires that
each partner must be allocated items of income and gain to the
extent of the greater of (1) the partner’s share of the decrease in
minimum gain allocable to the disposition of partnership property
subject to nonrecourse liabilities, or (2) the deficit balance in
such partner’s capital account at the end of the year. Under
respondent’s theory, THEI would be entitled to a minimum gain
chargeback of only $3,042,812, its share of the minimum gain
chargeback, because that amount would be greater than the
recalculated deficit in its capital account of $2,877,802.
Respondent’s argument that THEI must increase its capital
account is based upon an erroneous reading of the regulations. The
regulations state:
For purposes of �1.704-1(b)(2)(ii)(d) [the alternative
test for economic substance], the amount of a partner’s
share of partnership minimum gain shall be added to the
limited dollar amount, if any, of the deficit balance in
such partner’s capital account that such partner is
obligated to restore. * * * [Sec. 1.704-
1T(b)(4)(iv)(f)(2), Temporary Income Tax Regs., 53 Fed.
Reg. 53164 (Dec. 30, 1988).]
This provision of the regulations is specifically designed to
provide a means for nonrecourse deductions to meet the alternative
test for economic substance, described supra. The regulations do
so by treating a partner’s share of a minimum gain chargeback as an
amount the partner is required to restore to his or her capital
account. In the present case, however, neither the IHCL Original
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