Estate of Melvin W. Ballantyne, Deceased, Jean S. Ballantyne, Independent Executrix, and Jean S. Ballantyne - Page 18

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          credit, when determining his income tax.  Sec. 702(a); Vecchio v.           
          Commissioner, 103 T.C. 170, 185 (1994).  Each partner is taxed on           
          his distributive share of partnership income regardless of                  
          whether the amount is actually distributed to him.  United States           
          v. Basye, 410 U.S. 441, 454 (1973) (“Few principles of                      
          partnership taxation are more firmly established than that no               
          matter the reason for nondistribution each partner must pay taxes           
          on his distributive share.”); Vecchio v. Commissioner, supra at             
          185; sec. 1.702-1(a), Income Tax Regs.  A partner’s distributive            
          share of income or loss is generally determined by the                      
          partnership agreement.  Sec. 704(a).   The partnership agreement            
          may be written or oral.  Stern v. Commissioner, T.C. Memo. 1984-            
          383; sec. 1.761-1(c), Income Tax Regs.  In the case of an oral              
          partnership agreement, all the facts and circumstances                      
          surrounding the formation and operation of the partnership are              
          relevant in determining the sharing ratios of the partners.                 
          Barron v. Commissioner, T.C. Memo. 1992-598; Hogan v.                       
          Commissioner, T.C. Memo. 1990-295 n.7; Reed v. Commissioner, T.C.           
          Memo. 1978-58; Ryza v. Commissioner, T.C. Memo. 1977-64.  If the            
          partnership agreement does not provide as to a partner’s                    
          distributive share, or if the partnership agreement provides for            
          an allocation that does not have substantial economic effect,               
          then a partner’s distributive share is determined by the                    
          partner’s “interest in the partnership.”  Sec. 704(b).                      

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