Section 704, Targeted Allocations and the Distribution Waterfall: Overcoming Challenges Absent IRS Guidance

Understanding the Economic Effect Test and How to Allocate Income or Loss Using Targeted Allocations

Recording of a 110-minute CPE webinar with Q&A

Conducted on Thursday, June 29, 2017
Recorded event now available

This webinar will provide tax professionals with a review of the key concepts of targeted allocations and the role they play in making valid allocations to partners by partnerships and certain LLCs under Sect. 704(b).


Targeted allocations are not a new concept but are utilized with greater frequency than traditional allocations. The targeted allocations approach may achieve the same outcome as the traditional approach, but it arrives at the allocations differently.

Using targeted allocations, a partnership liquidates in accordance with a negotiated distribution waterfall that reflects exactly the partners’ economic deal. Traditionally, the allocation provisions of partnership agreements relied on IRC 704(b) safe-harbor economic effect regs and provided that income or loss would first be allocated to the partners’ capital accounts. After such allocations, cash or other property would be distributed in proportion to partner capital accounts.

Accounting professionals must understand the potential ramifications of using targeted allocations within the requirements of the Section 704(b) economic effect test, and associated rules that rely on an allocation that has economic effect when making other allocations that cannot have economic effect by their nature (e.g., nonrecourse deductions).

Listen as our panel of tax practitioners who are experienced with targeted allocations and Sect. 704(b) gives you a thorough briefing on this complex area and helps you anticipate partner allocation issues.


  1. Review of partnership allocation rules
  2. Targeted capital accounts vs. liquidating with capital accounts
    1. Layer cake and targeted allocations
  3. Other considerations
    1. Regulatory allocations
    2. Preferred returns
    3. Other


The panel will analyze and tackle these and other relevant topics:

  • “Economic effect” test safe harbor agreements vs. cash-driven agreements
  • Allocating income under either type of agreement
  • Relevant regulatory safe harbors

Learning Objectives

After completing this course, you will be able to

  • Determine the requirements for an allocation to have economic effect
  • Identify when allocations and distributions satisfy the safe harbor provisions
  • Verify that a partner’s distributive distribution satisfies the requirements of IRC 704(b)
  • Identify the advantages or disadvantages of targeted allocations
  • Discern the difference between targeted allocations of nonrecourse debt and recourse debt


Lynn E. Fowler, Partner
Kilpatrick Townsend & Stockton, Atlanta

Mr. Fowler's practice specializes in tax-efficient strategies for a variety of business entity formation, financing, operations and disposition transactions. He has worked with clients frequently on federal income tax credits, and taxable and tax-free M&A transactions.

Amanda Wilson, Partner
Lowndes Drosdick Doster Kantor & Reed, Orlando, Fla.

Ms. Wilson concentrates her practice on federal tax planning and structuring and represents clients in a wide variety of complex federal tax matters, with a particular emphasis on pass-through entities such as partnerships, S corporations and real estate investment trusts. Specifically, she focuses on advising clients on the formation, operation, acquisition and restructuring of pass-through entities.

EA Credit

Enrolled Agent credit processing is available for an additional fee per person.

EA Processing $5.00


Recorded Event

Includes full event recording plus handouts.

Note: Self-study CPE and EA credits are not offered on recorded events.

Recorded Webinar Download $147.00

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Recorded Audio Download (MP3) $147.00

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).

Program Materials

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Program Materials

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Strafford is a NASBA CPE sponsor and our live webinars qualify for CPE credits. They offer you a high quality, cost effective, and convenient CPE option, with no lost travel time or expenses.

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EA Credit

Strafford is an IRS approved continuing education provider and this course is approved for 2 enrolled agent (EA) credit hours.

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Customer Reviews

The conference was technical, informative and presented at a good pace.

Krystal Ching


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Joanna Johnston

Savas Greene & Company

Excellent seminar! It was efficient and the important topics were covered at just the right pace; no time was wasted covering information that the participants already knew.

Rhonda G. Williams, CPA

Barraclough & Associates

I loved the tools and handouts. Every CPE class should offer these kind of tools.

Jackie Meyer

Sample and Bailey

I appreciated the flow of the information offered and the ease at which I could follow the handouts.

Larry Bruck

WISS & Company

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