Allocation of p ship items

Question 1

What are the requirements for the basic test for economic effect?

Answer 1

(1) maintenance of capital accounts,

(2) liquidating distributions in accordance with positive capital account balance, and

(3) if a partner has a deficit balance in their capital account following the liquidation of the pship, that partner must be unconditionally obligated to restore the deficit in the capital balance by the close of the pship taxable year.

Question 2

What are the requirements for the alternate test for economic effect?

Answer 2

(1) maintenance of capital accounts

(2) liquidating distributions in accordance with positive capital account balance

(3) pship agreement must contain a “qualified income offset” provision.

Question 3

What is the economic effect equivalent test requirements for economic effect?

Answer 3

Fails the basic rules but still has economic equivalent of the same rules below:

1) maintenance of capital accounts,

(2) liquidating distributions in accordance with positive capital account balance, and

(3) if a partner has a deficit balance in their capital account following the liquidation of the pship, that partner must be unconditionally obligated to restore the deficit in the capital balance by the close of the pship taxable year.

Question 4

When are the 2 instances when a tax item must be allocated according to a partner’s interest in pship?

Answer 4

1. the pship agreement does not provide as to the partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof), OR
2. the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does NOT have substantial economic effect.

Question 5

What happened in Orrisch v. Commissioner?

Answer 5

The special allocations of depreciation deductions should be disregarded bc they weren’t allocated according to the partners’ capital accounts and, thus, didn’t have SEE.

Question 6

For allocations to be respected, what are the 2 requirements?

Answer 6

The allocation must have: (1) substantial (2) economic effect

This is called substantial economic effect safe harbor.

Question 7

If the allocation LACKS substantial economic effect, what happens?

Answer 7

The allocation must be made in accordance with the partners’ interests in the pship

Question 8

What are the 2 additional requirements for the alternate test for economic effect?

Answer 8

If 3 conditions are satisfied, then an allocation will be considered to have ECONOMIC effect to the extent the allocation:

1. Does not cause or increase a deficit balance in a partner’s capital account balance as of the pship year to which the allocation relates; OR
2. If the partner has a limited deficit restoration obligation, does not cause or increase a deficit balance in excess of any limited amount the partner is obligated to restore.

Question 9

1. When do promissory notes executed in favor of the partnership give rise to a credit in the partner’s book capital account?
2. How are unpaid balances on a promissory note treated as?

Answer 9

1. Promissory notes executed in favor of the partnership do not give rise to a credit in the partner’s book capital account. Rather, the capital account is increased only upon the payment of principal.
2. Any unpaid balance on the note is treated as a limited deficit restoration obligation.

Question 10

Partnership minimum gain is what

Answer 10

Nonrecourse deductions