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that the allocation (or allocations) will affect substantially the
dollar amounts to be received by the partners from the partnership,
independent of tax consequences.” Id. An allocation is not
substantial under these regulations if the allocation enhances the
after-tax economic position of at least one partner, and it is
likely that the after-tax consequences of none of the other
partners will be diminished. See sec. 1.704-1(b)(2)(iii)(a),
Income Tax Regs.
The requirement of substantiality is another provision
designed to ensure that allocations reflect economic reality.
Here, IHCL has allocated its annual income away from Mr.
Manchester, who succeeded to Dondi’s large capital account, to
THEI, which had a substantial negative capital account. This
special allocation had an economic effect because it operated first
to eliminate THEI’s negative capital account and, by creating a
positive capital account for THEI, then to increase THEI’s share of
IHCL’s assets to be received on liquidation. The special
allocation also ended Mr. Manchester’s claims to additional income.
The economic benefit to THEI and economic detriment to Mr.
Manchester combined to prevent the reallocation from failing the
requirement of the substantiality test. Accordingly, not only is
the special allocation consistent with the partners’ interests in
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