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Determinations of substantial economic effect, as well as
determinations of a partner’s interest in the partnership, are
dependent upon an analysis of the partners’ capital accounts.
Interhotel Co., Ltd. v. Commissioner, T.C. Memo. 2001-151.
A. Partnership Agreement and Substantial Economic Effect
The estate argues that the oral partnership agreement was
that Russell’s distributive share was the income or loss from the
farming activity, and Melvin’s distributive share was the income
or loss from the oil and gas activity. Russell and respondent
argue that the oral partnership agreement was that Russell’s and
Melvin’s distributive shares were equal but that each brother was
entitled to draw from the profits of the activity he operated.
As explained below, either a 50-percent allocation (as
advocated by Russell and respondent) or an allocation based on
the profits of the respective activities (as advocated by the
estate) lacks substantial economic effect and, therefore, the
distributive shares must be determined in accordance with the
partners’ interest in BBP. Thus, regardless of whether the
partnership agreement contained an allocation of items and what
that allocation was, the partners’ distributive shares are to be
determined in accordance with the partners’ interests in the
partnership.
If the partnership agreement provides for the allocation of
income, gain, loss, deduction, or credit (or item thereof) among
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