Allocations of Credits

• Author: William F. Machen
• Pages: 43-51

7.1. General Rules

As noted in Section 1, most buildings that are eligible for the

Rehabilitation Tax Credit are owned by limited partnerships or

limited liability companies that are taxed as partnerships for fed‑

eral income tax purposes. In general, allocations by a partnership

of prots, losses, and other tax items to a partner will be respected

only if such allocations have substantial economic effect within the

meaning of Code § 704(b) and the Treasury Regulations thereunder.

In order for an allocation to have economic effect that is substan‑

tial, it must satisfy a series of rules and conditions described in

great detail in the Treasury Regulations.

95

Among other things, the

Treasury Regulations require adjustments to the capital account

of each partner to insure that such partner actually will receive

the economic benet of any income and the economic detriment

of any loss allocated to such partner.

The Treasury Regulations under Code §704(b) provide that

allocations of tax credits and tax credit recapture cannot have

economic effect because such allocations do not affect a partner’s

capital account. Consequently, such allocations will be respected

only if they are in accordance with a partner’s interest in the part‑

nership at the time the tax credits or tax credit recapture arises.

95. See Treas. Reg. §1.704‑1(b)(2) (as amended in 2015).

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