Targeted partnership allocations
Targeted partnership allocations are starting to get attention.
Curt Wilson, the IRS associate chief counsel for partnerships, said, in response to questions at a tax conference in San Antonio in June, that the IRS will probably have to issue guidance at some point on such allocations. They are becoming more widespread in partnership agreements. Traditionally, partnership agreements have required that a “capital account” be maintained for each partner measuring what he put in and what he is allowed to take out of the partnership. When the partnership liquidates, each partner is distributed the balance in his capital account out of the proceeds from liquidating the partnership’s assets.
In a partnership with targeted allocations, the partners share in what is left when the partnership liquidates in whatever ratio their business deal is for sharing cash. Capital accounts are not used to divide up what remains.
IRS regulations require partners to use capital accounts for dividing up cash at liquidation unless sharing in some other ratio reflects the partners’ underlying economic interests in the partnership. The IRS has not explained how to determine the underlying economic interests, but its regulations suggest that the ratios in which the partners contribute capital and share income and losses are relevant in addition to how they have agreed to share cash flow.
IRS guidance is not imminent. Wilson was skeptical whether any guidance the IRS issues would prove useful since anything the agency publishes is likely to be fairly rudimentary and uncontroversial. Conference attendees said even an IRS acknowledgment that such allocations are allowed would have value.
The agency will look into including the subject on its 2014 business plan. The business plan is a list of issues the IRS hopes to address in the coming year.