Chapter 10, Section 10-4b explains partner allocations, review this section first. One benefit of a partnership entity is the flexibility in structuring the allocation of income and expenses amongst the partners. Corporations are stringent in their allocations; if you own 50%, you are distributed 50% and there is no deviation without tax consequences. Example 20 of the Big Picture illustrates this reasoning by allocating Maria the first $30,000 of gross revenues from bakery operations each year, starting in year 2. What is the rationale for doing this? The economic effect test must be met in order for allocations to pass the approval of the IRS.
For this assignment, I would like you to read the court case at this link: Goldfine v Commissioner, 80 TC 843 (1983)Download Goldfine v Commissioner, 80 TC 843 (1983)
Also, skim over these primary source materials relating to partner allocations:
IRC Sec 704Download IRC Sec 704
Reg. 1.704-1Download Reg. 1.704-1
Write a 3 – 5 paragraph summary of the material answering the following two (2) questions:
1. What is the basic test for substantial economic effect?
2. Do you agree with the judges opinion in the case? Why?
*Hint on reading court cases: Yes, it looks lengthy and hard to read! However, you do not need to read every word to understand what is going on. Try to find the judges ruling first, who won? The headnote tells you what tax law is governing the decision. Findings and facts gives you the background (don’t get hung up on all of the figures, I am no asking you to calculate anything). The opinion tells you what the judge decided.