| ||Revaluations Revisited: Partnership Allocations and the Demise of the Ceiling Rule |
Stephen B. Land*
* Partner, Linklaters, New York, New York; Harvard College, A.B., 1976; Harvard University, J.S., M.B.A., 1979.
The regulations under section 704 include detailed rules for maintaining partners’ capital accounts to ensure that the allocation of the partnership’s taxable income and loss among the partners will be respected for federal income tax purposes. Yet complying with these rules can be difficult and confusing for a partnership that must revalue its capital accounts to give effect to the business arrangements among the partners. These revaluations may become a routine event, particularly for investment partnerships, which typically revalue at the end of each year and upon any change in partnership interests. This article explains how investment partnerships can comply with the revaluation rules. Regulations issued in recent years permit these partnerships to use curative allocations and aggregate approaches to minimize distortions of income and simplify computations. Although the regulations address the most serious deficiencies of prior law, they persist in failing to state clearly how taxable income is to be allocated in the context of a revaluation. Instead, the regulations make general reference to section 704(c) principles, which are illuminated, but only to a limited extent, by numerical examples. This article seeks to remedy that failure with drafting examples that specify what investment partnerships must do to allocate income. Finally, the article briefly explores how these rules might be applied by other types of partnerships to depreciable property.
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