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accordance with each partner's interest in the partnership,
as provided by section 704(b)(1). Accordingly, we must
determine the interests of James and Darwin in the subject
animal farm partnership.
The regulations promulgated under section 704 define
the phrase "partner's interest in the partnership" as the
"manner in which the partners have agreed to share the
economic benefit or burden (if any) corresponding to the
income, gain, loss, deduction, or credit (or item thereof)
that is allocated." Sec. 1.704-1(b)(3)(i), Income Tax
Regs. The regulations also provide that the determination
of a partner's interest shall be made by taking into
account all facts and circumstances relating to the
economic arrangement of the partners. See sec. 1.704-
1(b)(3)(i), Income Tax Regs. Specifically, section 1.704-
1(b)(3)(ii), Income Tax Regs., provides that the following
four factors shall be considered in determining a partner's
interest in the partnership: (1) The partners' relative
contributions to capital; (2) the partners' interests in
economic profits and losses; (3) the partners' interests
in cash-flow and other nonliquidating distributions; and
(4) the rights of the partners to distributions of capital
upon liquidation of the partnership. See Vecchio v.
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