A and B form the AB partnership with each contributing \($50,000.\) A and B agree to comply with The Big Three. AB purchases \($50,000\) of stock and \($50,000\) of tax-exempt bonds and there is a strong likelihood the stock and bonds will produce approximately equal amounts of dividend income and taxexempt interest. In Year 1, A expects to be in a higher marginal tax bracket than B. A and B agree that in Year 1 the tax-exempt interest will be allocated 90% to A, 10% to B and the dividend income will be allocated 10% to A and 90% to B.

(a) Does this allocation have substantial economic effect?

(b) If AB receives \($10,000\) of tax-exempt interest and \($5,000\) of dividends in Year 1, and the allocation does not have substantial economic effect, how will the amounts be reallocated to A and B?