The Partnership Allocation Rules of Section 704(b): To Be or Not to Be

52 Pages Posted: 16 Apr 2009

Date Written: Spring 1998


The partnership allocation regulations under Section 704(b) are discussed and analyzed. These regulations provide rules under which a partnership may allocate items of income and deduction among its partners. The regulations are divided into 2 parts: 1. the substantial economic effect rules, which address allocations attributable to equity investments and recourse borrowings, and 2. the rules for allocating nonrecourse deductions, or allocations attributable to nonrecourse debt. The rules that provide for the allocation of partnership nonrecourse deductions and a host of others can be traced to a single source, the Supreme Court's decision in Crane v. Commissioner (1947), which permits nonrecourse debt used to acquire or improve property to be included in the basis of that property. The Crane decision has generated a plethora of rules designed to prevent abuses and attempt to make for a coherent system, all of which has dug a very deep hole. The answer is not to tinker with the code and regulations in the hope of making them more rational, but to throw in the towel, legislatively overrule Crane, and no longer permit nonrecourse debt to be included in basis.

Keywords: partnership allocation regulations, substantial economic effect rules, nonrecourse deductions rules, Crane v. Commissioner, taxation

JEL Classification: K29, K39, H25, H29

Suggested Citation

Schwidetzky, Walter D., The Partnership Allocation Rules of Section 704(b): To Be or Not to Be (Spring 1998). Virginia Tax Review, Vol. 17, No. 4, 1998, Available at SSRN:

Walter D. Schwidetzky (Contact Author)

University of Baltimore - School of Law ( email )

1420 N. Charles Street
Baltimore, MD 21218
United States
(410) 837-4410 (Phone)
(410) 837-4492 (Fax)

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