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

Description

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 conventional approach, but it arrives at the allocations differently.

Using targeted allocations, a partnership liquidates under a negotiated distribution waterfall that reflects precisely 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. Associated rules rely on an allocation that has economic effect when making other allocations that cannot have economic impact 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.