Chapter 6 - Allocation of Partnership Income Among the Partners: The Substantial Economic Effect Requirement

1. What requirements must be met in order for an allocation of income or loss to have economic effect?

1. A, B, and C form the equal ABC partnership.Capital accounts are properly maintained.Depreciation is allocated completely to C, but any distributions in liquidation will be made equally to each partner, although partners are required to restore deficit capital accounts upon liquidation.Does the allocation of depreciation have economic effect?

1. A, B, and C form the equal ABC partnership.Capital accounts are properly maintained.Depreciation is allocated completely to C, and any distributions in liquidation will be made according to the capital accounts of each partner.However, under local law any excess of liabilities over assets at the time of liquidation must be made up equally by each partner.Does the allocation of depreciation have economic effect?

1. A, B, and C form the equal ABC partnership.Depreciation is allocated completely to C, and any distributions in liquidation will be made according to the capital accounts of each partner.Partners are required to restore deficit capital accounts upon liquidation.The capital accounts of each partner are kept on a tax basis, so contributions and distributions of property are recorded in the capital accounts at the properties' bases.Does the allocation of depreciation have economic effect?

1. A, B, and C form the equal ABC partnership by contributing $100,000 each, and purchasing some equipment for $300,000.The equipment has a depreciable life of six years, and all depreciation (straight line) is allocated to A.Capital accounts are properly maintained.Any distributions in liquidation will be made according to the capital accounts of each partner.Partners are required to restore deficit capital accounts upon liquidation.Income aside from depreciation is $60,000 each year.If the partnership were liquidated at the end of year three, how much would each partner get?

What would your answer be if the liquidation occurred at the end of year four?

1. In order for special allocations of items of income or deduction to have substantial economic effect, the capital accounts of the partnership must be properly maintained under the rules of Code Sec. 704(b).Under those rules, when someone contributes property, is their capital account increased by its FMV or its basis?
2. When appreciated or depreciated property is distributed, what is the effect on the capital accounts?

1. Suppose that a partner's capital account balance and tax basis in her partnership interest is $200, and the FMV of her partnership interest is $300.In liquidation of her interest she gets distributed property with a FMV of $300 and a book value of $200.She had a 25% interest, so this leaves her with a capital account of $200 + $25 - $300 = -$75.She is no longer a partner, so what can the partnership do to make this deficit capital account go away?

1. If a partner contributes encumbered property to a partnership, what are the effects on his capital account for book purposes?How is this different from the effects on his basis when he contributes encumbered property?

1. If a partnership distributes encumbered property to a partner, what are the effects on her capital account?How is this different from the effects on her basis when she is distributed encumbered property?

1. Partner A is a 25% partner, and has a basis in her interest and capital account balance of $200,000.She contributes some land (FMV = $100,000, basis = $60,000, liability attached = $40,000) to the partnership.How much are her book capital account and basis afterward?

1. Partner A is a 25% partner, and has a basis in her interest and capital account balance of $200,000.She is distributed some land (FMV = $100,000, basis = $60,000, book value = $60,000, liability attached = $40,000) by the partnership.How much are her book capital account and basis afterward?

1. A, B, and C form the equal ABC partnership by contributing $100,000 each, and purchasing some equipment for $300,000.The equipment has a depreciable life of six years, and all depreciation (straight line) is allocated to A.Capital accounts are properly maintained.Any distributions in liquidation will be made according to the capital accounts of each partner.No partners are required to restore deficit capital accounts upon liquidation, but if partner A's capital account ends up with a deficit balance, A is to be allocated income sufficient to offset the difference as soon as possible.Income aside from depreciation is $60,000 each year.How much depreciation will be allocated to each partner in year 3?How much will be allocated to each partner in year 4?

1. Partner A of the AB partnership has $100,000 of NOLs, and partner B has $100,000 of long term capital losses.The partnership is expected to earn $100,000 of ordinary income and $100,000 of long term capital gains during the year.The partnership agreement is amended to allocate this year's ordinary income to A and long term capital gain to B.Assume that the three tests for economic effect are met.Is this allocation substantial?Why or why not?What type of allocation is it, a shifting allocation or a transitory allocation?Would the allocation be substantial if A did not have a net operating loss carryforward?

1. The ABCD Partnership owns an office building.In a special allocation that has economic effect, partner D is allocated all of the depreciation from the building, and all of the gain from any sale of the building, up to the amount of depreciation taken.Any gain in excess of depreciation taken is to be split equally among the partners.The building is expected to be sold for a substantial gain within four years.Is this allocation substantial?Why or why not?