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IRC Sect. 704(b): Partnership Allocations

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While a partnership agreement ultimately determines a partner's distributive share of income, gain, loss, deduction or credit, Sect. 704(b) is the starting point to determine validity of allocations by a partnership or LLC treated as a partnership.

Navigating Sect. 704(b) presents a number of complexities. For an allocation to be valid, it must meet three separate prongs of the regulations, and one of those prongs calls for passing both “economic effect” and “substantiality” tests at the end of the tax year.

Tax professionals and attorneys must work within detailed requirements of 704(b) tests and IRS administrative guidance and associated rules on non-recourse debt (and associated developments such as revised Sect. 108(e)(8) debt-for-equity regs and a proposed elimination of a de minimis rule in REG-109564-10).

Listen as our panel of tax practitioners highly experienced with Sect. 704(b) gives you a thorough briefing on this constantly changing area of tax policy and helps you anticipate partner allocation issues when crafting partnership agreements.