BULLETPROOFING SPECIAL ALLOCATIONS

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                       BULLETPROOFING SPECIAL
                            ALLOCATIONS

                     Michael L. Holland, Valdosta State University

                             
				
DOCUMENT INFO
Description: Partnerships are attractive investment vehicles because they are not taxable entities and because partners generally have the ability to allocate any item of income, gain, loss, expense or deduction among themselves as they wish. The ability to allocate losses may lead to taxpayer abuses. To curb potential abuses, Congress and the Internal Revenue Service (IRS) have placed limits on special allocations, requiring that the allocation has "substantial economic effect." The Regulations provide that the determination of substantial economic effect consists of a two part analysis that is made at the end of the partnership taxable year to which the allocation relates. The allocation must have economic effect and the economic effect must be substantial. To have "economic effect" a partner's capital balance must be adjusted for allocations and distributions and the liquidation of a partner's interest must be based on the readjusted capital account balance with any deficit balance restored by the partner. To be "substantial", there must be a reasonable possibility that the allocation will materially affect the dollar amounts to be received by the partners from the partnership, independent of tax consequences. This paper discusses the requirements for successfully shifting tax benefits between partners through special allocations. [PUBLICATION ABSTRACT]
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