In short
A partnership agreement can allocate income, gain, loss or deductions among partners differently from their ownership shares. The allocation is respected only if it has substantial economic effect.
Key takeaways
- Economic effect generally requires proper capital accounts, liquidating distributions based on them, and a deficit restoration obligation or qualified income offset.
- Allocations without substantial economic effect are reallocated based on the partners' interests in the partnership.
- Allocations of built-in gain on contributed property follow separate rules.
Where it's tested
REG: Partnership Taxation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A partner has an outside basis of $20,000, which includes a $12,000 share of partnership liabilities. The partnership repays all of its debt. What is the tax consequence to the partner?