Discussion Question $21-9($LO$.8)$

Complete the paragraph below regarding the purpose of the three rules that implement the economic effect test.

The three rules of the economic effect test are designed to ensure that a partner bears the economic burden of a loss or deduction allocation $$ by $$ the partner's capital account and requiring the partner to ultimately be responsible to make up any deficit $$ in the account. In addition, it ensures that a partner bears and receives the economic benefit of

$$ by $$ the partner's capital account.

What is one way you might be able to ensure a partnership intends to follow these rules?

We $$ examine the partnership agreement to determine if the partnership intends to follow these rules. Most partnership agreements $$ an "Allocations" discussion that specifically references the $704($b$)$ regulations.