Yes, thank you, I believe it does.

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xyzer[at]hotmail.com wrote:

- quote -

OK, I'll attempt to comment. I agree that this is an area
that can be difficult to deal with in actual practice.

First, a classic example: Say that A and B have formed a
50-50 partnership and that their income for the year
consists of $100 of interest (ordinary income) and $100 of
long term capital gains (preferential tax rate). So, we
would expect each of the partners to receive a K-1
reflecting $50 of interest and $50 of LTCG.

But, after knocking back a couple of cosmos at the local
watering hole, the following plot is hatched: The partners
discover that A is in a higher tax bracket than B. So, they
decide to abandon the "default" allocation scheme noted
above in favor of "specific" allocations. They decide to
allocate $99 of the capital gain to A (because he can
benefit from the lower tax rate) and $99 of the interest
income to B (who won't be adversely impacted by the
additional ordinary income). So, what's wrong with that?
After all, this is a 50-50 partnership, their total income
was $200 and each partner is receiving $100 of it.

The problem, of course, is that this allocation scheme has
no "economic effect" OTHER THAN tax avoidance. It therefore
"fails" the limitations on specific allocations.

Now, here's an actual example that came to my attention many
years ago: Three of my college buddies formed an "equal"
partnership. But, one had some financial problems (ie: he
had gotten married). With the permission of the other
partners, he "drew" more than his 1/3 share of the
partnership income. When it came to the end of the year,
their accountant at the time (not me!) prepared the K-1s by
allocating the income in the same ratio as draws (so,
basically, each partner paid tax on the amount of money he
had actually received). That went on for 3 or 4 years until
the partnership eventually terminated.

Fast forward MANY years... I ran into one of the
non-overdrawn partners and asked how the others were doing.
He mentioned that he had recently met with the overdrawn
partner (who had become quite successful in the meantime)
and "settled up" on their long defunct partnership. "Settled
up" ??? Hmmm...

Here was the problem: Although the partnership income had
been allocated based on draws for TAX PURPOSES, it became
apparent that some different allocation scheme was used for
PARTNERSHIP ACCOUNTING PURPOSES. Therefore, I would say that
the specific allocation scheme used on the partnership tax
returns lacked "substantial economic effect" because it did
NOT reflect the ACTUAL methodology by which income was
credited to the partners. (I don't know, of course, whether
the partner I was talking to reported any additional income
based on the settlement, and I am obviously reading between
the lines just a bit.)

So, does that shed some light on this issue?

MTW

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I'm studying for the Regulation section of the CPA exam and
am having a little trouble grasping this part of Partnership
taxation. Anybody care to opine and talk about this topic
at all? The more you say the better! hah

thanks

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