Whistleblowing
Hoffman, Raabe, Smith, & Maloney, CPAs
5191 Natorp Boulevard
Mason, OH 45040
September 6, 2013
Grayson Investments, Inc.
53 E. Marsh Ave.
Smyrna, GA 30082
Dear Ana Marks & Blake Caldwell,
This letter is regarding the issue of the necessity of reallocating MACRS deductions to satisfy the “economic effect” requirements of Reg. 1.704-1 and 1.704-2.
Economic effect regulations tie tax allocations to economic benefits and burdens through the partners’ capital accounts. Allocations satisfy the primary economic effect test when the partnership agreement provides for the following provisions: * The partners must maintain their capital accounts in accordance with the rules contained in Treas. Reg. 1.704-1(b)(2)(iv).
* If the partnership liquidates, or any partner’s interest in the partnership, the partners must receive assets equal to the positive balance in their capital accounts.
* The partners have a responsibility to maintain a positive balance in their capital accounts. If there is ever a negative balance in a partner’s capital account, the partner is responsible to restore the balance back to a positive balance.
Since both partners have no economic risk of loss with respect to the nonrecourse debt, deductions based on non-recourse deductions do not fall within the requirements of the substantial economic effect test.
Treasury Regulation 1.704-2 states that nonrecourse deductions must be allocated with the partners’ interests in the partnership. Therefore, the MACRS deduction allocation for Blake for the first three years would be $140,000 and Grayson’s allocation for the MACRS decuction would be $60,000.
If I can be of further assistance to you in this matter, please don’t hesitate to contact me.
Sincerely,
Mandy Adams, CPA
Partner
Reg. 1.704-1(b)(2)(iv) states (a) In general. The economic effect test described in paragraph (b)(2)(ii) of this section
5191 Natorp Boulevard
Mason, OH 45040
September 6, 2013
Grayson Investments, Inc.
53 E. Marsh Ave.
Smyrna, GA 30082
Dear Ana Marks & Blake Caldwell,
This letter is regarding the issue of the necessity of reallocating MACRS deductions to satisfy the “economic effect” requirements of Reg. 1.704-1 and 1.704-2.
Economic effect regulations tie tax allocations to economic benefits and burdens through the partners’ capital accounts. Allocations satisfy the primary economic effect test when the partnership agreement provides for the following provisions: * The partners must maintain their capital accounts in accordance with the rules contained in Treas. Reg. 1.704-1(b)(2)(iv).
* If the partnership liquidates, or any partner’s interest in the partnership, the partners must receive assets equal to the positive balance in their capital accounts.
* The partners have a responsibility to maintain a positive balance in their capital accounts. If there is ever a negative balance in a partner’s capital account, the partner is responsible to restore the balance back to a positive balance.
Since both partners have no economic risk of loss with respect to the nonrecourse debt, deductions based on non-recourse deductions do not fall within the requirements of the substantial economic effect test.
Treasury Regulation 1.704-2 states that nonrecourse deductions must be allocated with the partners’ interests in the partnership. Therefore, the MACRS deduction allocation for Blake for the first three years would be $140,000 and Grayson’s allocation for the MACRS decuction would be $60,000.
If I can be of further assistance to you in this matter, please don’t hesitate to contact me.
Sincerely,
Mandy Adams, CPA
Partner
Reg. 1.704-1(b)(2)(iv) states (a) In general. The economic effect test described in paragraph (b)(2)(ii) of this section