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Income Tax Regs. BBP does not meet requirements (1) and (2)
because BBP did not maintain any capital accounts. Thus, the
proffered allocations fail the alternate test for economic
effect.
Allocations which fail the economic effect test may be
deemed to have economic effect if they pass the economic effect
equivalence test. In Vecchio v. Commissioner, supra at 192, we
stated:
Allocations made to a partner that do not
otherwise satisfy the economic effect test,
nevertheless, are deemed to have economic effect,
provided that, as of the end of each partnership
taxable year, a liquidation of the partnership at the
end of such year or at the end of any future year would
produce the same economic results to the partners as
would occur if all the requirements of the economic
effect test had been satisfied, regardless of the
economic performance of the partnership. Sec. 1.704-
1(b)(2)(ii)(i), Income Tax Regs.; see also Elrod v.
Commissioner, 87 T.C. 1046, 1086 n.23 (1986). * * *
None of the parties have argued or demonstrated that either of
the proffered allocations satisfies this economic effect
equivalence test.
As mentioned earlier, where the partnership agreement does
not provide as to a partner’s distributive share, or where the
partnership agreement provides for an allocation that does not
have substantial economic effect, a partner’s distributive share
is determined by the partner’s “interest in the partnership.”
Sec. 704(b). As stated above, the allocations proposed by the
parties lack economic effect. Thus, the gain from the grain
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