PARTNERSHIP INCOME AND LOSS ALLOCATIONS BEFORE AND AFTER THE TAX REFORM ACT OF 1976

THE 1976 TAX REFORM ACT HAS THE BENEFICIAL EFFECT OF MAKING IT CLEAR THAT OVERALL ALLOCATIONS OF PARTNERSHIP PROFIT AND LOSS MUST HAVE ECONOMIC SIGNIFICANCE. IN REACHING THAT RESULT, THE ACT MAY HAVE LEFT SOME AMBIGUITY AS TO THE PROPER ALLOCATIONS WHEN THE AGREEMENT DOES NOT REFLECT THE PROPER ECONOMIC EFFECT. IN ADDITION, IT HAS LEFT A GOOD DEAL OF UNCERTAINTY IN THE AREA OF ITEM ALLOCATION AND HAS ADOPTED AN OVERLY INFLEXIBLE SYSTEM FOR THE ALLOCATION OF ITEMS. A PRIME FUNCTION OF REGULATIONS TO BE ISSUED UNDER SECTION 704 WILL BE TO PROVIDE GUIDANCE CONCERNING THE DETERMINATION OF THE SUBSTANTIAL ECONOMIC EFFECT OF THE PARTNERSHIP AGREEMENT. THE DISTRIBUTION PROVISIONS COMPLETELY DESCRIBES THE ECONOMIC AGREEMENT OF THE PARTNERS. THE PROFIT AND LOSS PROVISION HAS NO IMPACT UPON THE AGREEMENT OTHER THAN ITS POSSIBLE IMPACT FOR TAX PURPOSES.