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1 Presenting a live 110 minute teleconference with interactive Q&A Sect. 704(c): Partnership and LLC Contributions Navigating Complex Rules and Electing Allocation Methods to Avoid Adverse Tax Consequences WEDNESDAY, JULY 6, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: David Patch, Senior Director and Leader, National Tax Pass-Throughs Group, BDO USA, Bethesda, Md. Leo Hitt, Partner, Reed Smith, Pittsburgh Telma Nadvorny, Senior Manager, Ernst & Young, Houston For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Section 704(c): () Partnership and LLC Contributions Seminar July 6, 2011 Telma Nadvorny, Ernst & Young David Patch, BDO USA Leo Hitt, Reed Smith

6 Today s Program Sect. 704(c) Fundamentals [Telma Nadvorny] Slide 7 Slide 26 Reverse Sect. 704(c) Allocations [David Patch] Slide 27 Slide 46 Distribution Of Sect. 704(c) Property, Partnership Mergers And Anti-Abuse Rules [Leo Hitt] Slide 47 Slide 63

7 Telma Nadvorny, Ernst & Young SECT. 704(c) FUNDAMENTALS

8 Disclaimer Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited it located in the U.S. This presentation is 2011 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. The views expressed by the presenter in this webinar are not necessarily those of Ernst & Young LLP. Page 8

9 Disclaimer (Cont.) Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Interval Revenue Code or applicable state or local tax laws. Page 9

10 Sect. 704(c): Introduction If the basis of contributed property differs from its 704(b) book value, 704(c)(1)(A) requires that income, gain, loss and deduction with respect to such property be allocated among the partners so as to take account of the variation between the basis of the property to the partnership and its FMV at the time of contribution. ti Regulations require a reasonable method that is consistent with the purpose of 704(c). Sect. 704(c) principles also apply in the context of a 704(b) revaluation, ation or book-up, p through so-called reverse erse 704(c). Page 10

11 Interface Of 704(b) And (c): Two Universes The purpose of 704(b) is to govern the economics; it looks to fair market value upon contribution. The purpose of 704(c) is to prevent taxable gain or loss inherent in property at the time of contribution from being shifted to another partner; it looks to the difference between adjusted tax basis and fair market value upon contribution. Sect. 704(c) tax allocations are determined after 704(b) book allocations are determined. Page 11

12 Sect. 704(c) Available Methods Traditional method Traditional method with curative allocations Remedial method Other reasonable methods Page 12

13 Choice Of Method: Impact Method affects taxable income. Partners have adverse interests negotiate the method up front. Method chosen is more important if property s depreciable tax basis is less than the non-contributing partner s aggregate share of book value (i.e., ceiling rule). If parties are in different tax positions, the choice of method may result in aggregate tax savings to parties that may be shared (subject to anti-abuse rule). A partnership may retain flexibility by: (1) determining the method on a property-by-property t basis, and (2) waiting until the partnership must report a 704(c) item on a tax return before choosing methods. Page 13

14 Mix-And-Match Rules Different methods allowed for different property p Different methods can apply for forward 704(c) and to each layer of reverse 704(c) in the same property Must consistently apply method to item of property Overall mix-and-match must be reasonable Aggregation is possible for securities partnerships and a few others see Treas. Reg (e) Page 14

15 Traditional Method Operative rule tax follows book Non-contributing partner receives tax allocations equal to its share of book items. Contributing partner receives residual tax allocations. Ceiling limitation If there are insufficient tax items, non-contributing partners may not receive tax allocations equal to their share of book items. Applies to gain or loss from sale of property and to depreciation and/or amortization; generally does not apply to income from the 704(c) property Page 15

16 Five-Step Approach Step 1: Compute tax item Step 2: Compute book item Step 3: Allocate book item Step 4: Allocate tax to non-contributing partner to the extent of its share of the book item Step 5: Allocate residual tax, if any, to contributing/ 704(c) partner Page 16

17 Example 2 Traditional Method Allocating Depreciation Step 1: Compute annual tax depreciation $50/4 = $12.5 Money Co. Op. Co. Step 2: Compute annual book depreciation $12.5/$50 x $100 = $25 50% 50% Step 3: Allocate book depreciation (50-50) Remaining tax life on Step 4: Allocate tax depreciation to Money Co. equipment: 4 years JV (non-contributing partner) to extent of book Step 5: Allocate residual tax depreciation (if any) to Op. Co. as contributing partner Equipment FMV=100 Cash FMV=200 Land FMV=100 Partnership Book JV Tax (50%) Money Co. Book Tax ATB=50 Book ATB=200 (50%) Op. Co. Tax $25.0 $12.5 $12.5 $12.5 $12.5 $0.0 ATB=80 Page 17

18 Example 3 Traditional Method: Allocating Gain On Sale Step 1: Compute partnership tax gain $100 - $50 = $50 Step 2: Compute partnership book gain $100 - $100 = $0 Step 3: Allocate book gain (50-50) Step 4: Allocate tax gain to Money Co. (noncontributing partner) to extent of book Step 5: Allocate residual tax gain (if any) to Op. Co. as contributing partner Partnership Book $0.0 JV Tax (50%) Money Co. Book Money Co. Tax $50.0 $0.0 $0.0 Equipment FMV=100 ATB=50 50% 50% JV Cash FMV=200 ATB=200 JV sells equipment for $100 Book $0.0 (50%) Op. Co. Tax $50.0 Op. Co. Land FMV=100 ATB=80 Page 18

19 Ceiling Rule The Rule: Total income, gain, loss or deduction d allocated to noncontributing partners with respect to contributed property may not exceed total partnership income, gain, loss or deduction recognized by partnership with respect to that property for the taxable year (the ceiling rule). Impact: To the extent that tax items allocated to a non-contributing partner fall short of matching book items allocated to it, a portion of the built-in gain or loss is shifted to such partner. Page 19

20 Example 4: Illustration Of Ceiling Limitation Step 1: Compute annual tax depreciation Step 2: Compute annual book depreciation Money Co. Op. Co. $10/$40 x $100 = $25 50% 50% Step 3: Allocate book depreciation (50-50) Remaining tax life on Step 4: Allocate tax depreciation to Money Co. equipment: 4 years JV (non-contributing partner) to extent of book Step 5: Allocate residual tax depreciation (if any) to Op. Co. as contributing partner Equipment FMV=100 ATB=40 Cash FMV=200 ATB=200 Land FMV=100 ATB=80 Partnership (50%) JV Money Co. Book Tax Book Tax $25.0 $10.0 $12.5 $10.0 (50%) Op. Co. Book Tax $12.5 $0.0 Page 20

21 Traditional Method With Curative Allocations Addressing Ceiling Limitations This method is designed to help correct distortions created by the ceiling rule. Partnerships may make reasonable curative allocations to reduce or eliminate disparities between book and tax items of non-contributing partners. Same five-step process as traditional method is followed, except that tax items (gain/loss/depreciation) /d i from other property are used to make up for some or all ceiling rule distortions in Step 4. Tax allocations only are affected; book allocations are unaffected. Page 21

22 Traditional Method With Curative Allocations Addressing Ceiling Limitations (Cont.) Curative allocations must be reasonable in amount, timing and type. Amount: Curative allocation can t exceed ceiling distortion for that year (or prior years, if cure is for ceiling limitation on disposition). Timing: A curative allocation can offset ceiling distortions for prior years if an allocation is made over the economic life of the property, and is provided for in the partnership agreement at time of contribution. Type: A curative allocation must be expected to have substantially the same effect on each partner s tax liability as the tax item limited by the ceiling rule. The expectation is generally tested at time the property is contributed, and the curative allocation is made part of the partnership agreement. Page 22

23 Remedial Method Allows partnership to create (i.e., e "fabricate") income and deduction items Not dependent d on adequacy of partnership items; thus completely l prevents any ceiling rule limitations Remedial items have no effect on book capital accounts. Calculation of book depreciation is different than traditional or curative method. Page 23

24 Book Depreciation: Remedial Method Book basis of asset is split into two components: Tax amount that equals the actual tax basis Book amount calculated as excess of book basis over tax basis Amount of book basis equal to tax basis is recovered over remaining tax recovery period. Excess book basis is treated as new asset and depreciated over applicable asset life. Follow same five-step process as traditional method, except that remedial tax items are made up to equal ceiling limitations in Step 4. Page 24

25 General Rules For Planning: Which Method Is Best For You Or Your Client? Generally, methods will differ only if the ceiling rule will apply. Otherwise, you reach the same result using the traditional method. Note that the remedial method is available even if there is not a current ceiling limitation as a protective measure for ceiling limited sale. If you are, or represent, a property contributor: Negotiate for the traditional method (with potential for shifting tax consequences to money partner) Don t want curatives too fast a burn-off of built-in gain with phantom income allocated to property contributor Compromise on remedials Especially if big book-up and long lives Stretches out realization of built-in gain Page 25

26 General Rules For Planning: Which Method Is Best For You Or Your Client? (Cont.) If you are, or represent, a cash contributor: Negotiate for curatives (if adequate items) Fastest expensing of investment Especially if short remaining recovery cycle Don t want traditional method with exposure for shifting tax consequences Compromise on remedials Page 26

27 David Patch, BDO USA REVERSE SECT. 704(c) ALLOCATIONS

28 Circular 230 Disclaimer Any U.S. tax advice contained herein is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax laws. You should consult with your professional tax advisor before taking any action based on information presented during this webinar. Section 704(c) Allocations 2828

29 Reverse 704(c) Forward 704(c) - Sect. 704(c) applies to contributed property to the extent that its 704(b) basis (fair market value) is different than its tax basis at the time of contribution. Reverse 704(c) - Revaluations may also cause a difference between a property s 704(b) basis and its tax basis. - This difference is also subject to Sect. 704(c). - The existing partners are considered contributing partners to the extent of unrealized gain in the partnership s property. Section 704(c) Allocations 29

30 Revaluations Partnerships may revalue capital accounts upon certain events: Contributions in exchange for an interest Distributions in exchange for an interest Grant of an interest for services Standard industry practice (hedge funds) Must reflect fair market value of partnership property Unrealized gain or loss allocated as if recognized Technically optional, but generally necessary to preserve economic deal Section 704(c) Allocations 30

31 Reverse 704(c) A $70 B A and B form equal partnership AB. $70 Each contributes $70, and AB buys land for $140. AB Land Value =$140 Basis = $140 Section 704(c) Allocations 31

32 Reverse 704(c) (Cont.) B C A 50% 50% $100 When the land is worth $200, AB admits new partner C as an equal partner for $100. AB Land Value =$200 Basis = $140 Cash $100 Section 704(c) Allocations 32

33 Reverse 704(c) (Cont.) B C A AB Sells the land for $230 How should the gain be allocated? AB Proceeds $230 Basis $140 Gain $ 90 $230 Land Buyer Section 704(c) Allocations 33

34 Reverse 704(c): Capital Accounts Without Revaluation A B C Beginning Capital Revaluation Gain C s Contribution 100. Gain On Sale Ending Capital Taxable Gain Section 704(c) Allocations 34

35 Reverse 704(c): Capital Accounts (Cont.) With Revaluation A B C Beginning Capital Revaluation Gain C s Contribution 100. Gain On Sale Ending Capital Taxable Gain Section 704(c) Allocations 35

36 Reverse 704(c) (Cont.) Conceptually, reverse 704(c) allocations A B work as if a new partnership is created with every revaluation. AB C Property ABC $ D Property ABCD $ Section 704(c) Allocations 36

37 704(c) Layers A B 50% 50% Property A $10,000 Basis = $4,000 Value = $10,000 AB Tax Basis 704(b) Layer 1 Property A $ 4,000 $10,000 $6,000 Property AB $10,000 $10,000 $0 AB buys property AB for $10,000 Section 704(c) Allocations 37

38 704(c) Layers (Cont.) Assumptions $400 tax depreciation on Property A $1,000 tax depreciation on Property AB Traditional method is used Total Depreciation B's share A's Share Tax Basis 704(b) Tax 704(b) Tax 704(b) Tax 704(b) Property A 4,000 10, , Property AB 10,000 10,000 1,000 1, Section 704(c) Allocations 38

39 704(c) Layers (Cont.) A 50% 50% B AB Tax Basis 704(b) Layer 1 Property A $ 3,600 $9,000 $5,400 Property AB $ 9,000 $9,000 $0 Section 704(c) Allocations 39

40 704(c) Layers (Cont.) The actual values of properties A and AB increase to $12,000 and $18,000. C is admitted as a 50% partner for $30,000. AB Buys property ABC for $30,000. Properties A, AB and ABC have tax depreciation of $400, $1,000 and $3,000, respectively A 25% 25% AB B 50% C $30,000 Tax Basis 704(b) Layer 1 Layer 2 Property A $ 3,600 $12,000 $5,400 $3,000 Property AB $ 9,000 $18,000 $0 $9,000 Property ABC $30,000 $30,000 $0 $0 Section 704(c) Allocations 40

41 Separate Layers A 50% 50% B Separate Layer Approach AB C Tax Basis 704(b) Property A $ 3,600 $12,000 Property AB $ 9,000 $18,000 50% 50% $30,000 ABC Section 704(c) Allocations 41

42 Separate Layers (Cont.) ABC Partnership Total Depreciation C's share AB's Share Tax 704(b) Tax 704(b) Tax 704(b) Tax 704(b) Property A 3,600 12, , Property AB 9,000 18,000 1,000 2,000 1,000 1, ,000 Property ABC 30,000 30,000 3,000 3,000 1,500 1,500 1,500 1,500 AB Partnership Total Depreciation B's share A's Share Tax Basis 704(b) Tax 704(b) Tax 704(b) Tax 704(b) Property A 3,600 12, Property AB 9,000 18, , Property ABC 30,000 30,000 1,500 1, Section 704(c) Allocations 42

43 Collapsed Layers A B C 25% 25% 50% Collapsed Layer Approach ABC Share of 704(b)/Tax Disparity Basis 704(b) Ptr A Ptr B Ptr C Property A $ 3,600 $12,000 $6,900 $1,500 $0 Property AB $ 9,000 $18,000 $4,500 $4,500 $0 Property ABC $30,000 $30,000 $0 $0 $0 Section 704(c) Allocations 43

44 Collapsed Layers (Cont.) Property A Depreciation A B Total Original 704(c) 5,400-5,400 Revaluation 1,500 1,500 3,000 Total Basis Disparity 6,900 1,500 8,400 CY Depreciation Disparity A B C Total 704(b) Depreciation ,333 Less: CY Disparity (767) (167) - (933) Before Ceiling Rule (433) Ceiling Rule Limitation 433 (87) (346) - Tax Depreciation (0) Section 704(c) Allocations 44

45 Aggregation For Securities Partnerships Investment partnerships SEC-registered management companies Applies only to qualified financial assets (QFAs) - Actively traded personal property (e.g., stock) - Expanded definition for management companies Allocations in proportion to capital Reverse 704(c) allocations only - IRS may grant permission to combine with forward 704(c). Section 704(c) Allocations 45

46 Aggregation for Securities Partnerships (Cont.) Reverse Sect. 704(c) layers for all QFAs are combined into a revaluation account for each partner. All recognized gains and losses are allocated based on the relative revaluation accounts. Full netting - One combined revaluation account for both gains and losses - All gains and losses allocated based on the single revaluation account Partial netting - Separate revaluation accounts for gains and losses - Gains allocated based on gain revaluation account, losses based on loss revaluation ation account Section 704(c) Allocations 46

47 Leo Hitt, Reed Smith DISTRIBUTION OF SECT. 704(c) PROPERTY, PARTNERSHIP MERGERS AND ANTI ABUSE RULES

48 Strafford Sect. 704(c): Partnership and LLC Contributions Statutory Backstopping Of Sect. 704(c) There are two potential ways to avoid Sect. 704(c) s application that were addressed by statute. Property subject to the Sect. 704(c) allocation is distributed to someone other than the contributing partner. [Sect. 704(c)(1)(B)] Property, other than the property subject to the Sect. 704(c) allocation, is distributed to the contributing partner. [Sect. 737] 48

49 Strafford Sect. 704(c): Partnership and LLC Contributions Statutory Backstopping Of Section 704(c) (Cont.) Sect. 704(c)(1)(B) Contributing partner must recognize a gain or loss, if the property contributed is distributed to another partner within seven years of the contribution. The amount of the gain or loss recognized is the amount that would have been allocated to the contributing partner if the property had been sold for its fair market value. The character of the gain or loss is treated as if sold to the distributee partner. 49

50 Strafford Sect. 704(c): Partnership and LLC Contributions Statutory Backstopping Of Section 704(c) (Cont.) Sect. 704(c)(1)(B) (Cont.) Consistent basis adjustments are made to the basis of the contributing partner in the partnership and the distributed property. The gain or loss is recognized only by the contributing partner, not by the partnership or the other partners. There are a number of exceptions, including: Certain transactions in which the built-in gain or loss is preserved Incorporation transactions. if the partnership is liquidated Pre-effective date contributions (10/3/1989) 50

51 Strafford Sect. 704(c): Partnership and LLC Contributions Statutory Backstopping Of Sect. 704(c) Sect. 704(c)(1)(B): Example Susan contributed Property A, Sect. 704(c) property, to PRS. Susan Contributes: Property A FMV = $100 AB = $60 PRS Gabrielle 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity

52 Contributes: Property A FMV = $100 AB = $60 Statutory Backstopping Of Sect. 704(c) Sect. 704(c)(1)(B): Example (Cont.) Susan contributed Property A, Sect. 704(c) property, to PRS. Susan PRS Gabrielle Property A If Property A is distributed by PRS within seven years of the date of contribution, Susan recognizes gain or loss under Sect. 704(c)(1)(B) as if such property were sold for its FMV at the time of the distribution. Susan would recognize a $40 gain, presuming FMV has not declined. Sect. 704(c)(1)(B) does not trigger reverse-sect. 704(c) gain or loss. Exceptions Property A can be distributed ib t d back to Susan. Like-kind kind property exception 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity

53 Strafford Sect. 704(c): Partnership and LLC Contributions Statutory Backstopping Of Sect. 704(c) (Cont.) Sect. 737 In the case of a distribution to a contributing partner of property, the partner shall recognize gain equal to the lesser of: The value of the distributed property over the partner s basis in the partnership interest, before the distribution less cash distributed (not below zero); or The net pre-contribution gain of the partner. The Sect. 737 gain is in addition to any gain recognized on the distribution ib ti under Sect

54 Strafford Sect. 704(c): Partnership and LLC Contributions Statutory Backstopping Of Sect. 704(c) (Cont.) Sect. 737 (Cont.) The character of the Sect. 737 gain is a proportionate share of the net pre-contribution gain. Net pre-contribution gain is the net gain which would be recognized under Sect. 704(c)(1)(B) if there was a distribution to another partner of any property contributed by the contributing partner within seven years of the distribution, and still held by the partnership at the time of distribution. 54

55 Strafford Sect. 704(c): Partnership and LLC Contributions Statutory Backstopping Of Sect. 704(c) (Cont.) Appropriate basis adjustments are made to the basis of the partner in the partnership and to the adjusted basis of the partnership in the contributed property. Exceptions Distributions of previously contributed property to the contributor The extent to which Sect. 751 s hot asset rule applies. 55

56 Strafford Sect. 704(c): Partnership and LLC Contributions Statutory Backstopping Of Sect. 704(c) Sect. 737: Example Susan contributed Property A, Sect. 704(c) property, to PRS on 1/1/2006. Susan Gabrielle Property A Cash $100 FMV = $100 AB = $50 PRS Property A Property B (acquired by PRS for $80) 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity

57 Statutory Backstopping Of Sect. 704(c) Sect. 737 Example (Cont.) Susan contributed Property A, Sect. 704(c) property, to PRS on 1/1/2006. PRS distributes Property B to Susan on 1/1/2010. Susan Property B Gabrielle Property A Cash $100 FMV = $100 AB = $50 PRS Property A Property B (acquired by PRS for $80, FMV $80 on distribution) Susan recognizes gain under Sect Gain triggered is equal to the lesser of Susan s: s: Net pre-contribution gain ($50)., or Excess distribution (FMV of the distributed property Susan s s outside basis = $80 $50 = $30). Exceptions Any yp property p Susan contributed to PRS can be distributed back to Susan. Sect. 751(b) 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity

58 Strafford Sect. 704(c): Partnership and LLC Contributions Sect. 704(c) In Partnership Mergers And Divisions Notice The Treasury Department invited comments regarding the proper application of Sect. 704(c) in the context of partnership mergers and division. Areas raised within the Notice included: Tiered partnerships Multiple layers of forward and reverse of Sect. 704(c) gain and loss International issues 58

59 Strafford Sect. 704(c): Partnership and LLC Contributions Section 704(c) In Partnership Mergers And Divisions (Cont.) Notice (Cont.) Numerous groups provided comments and raised a variety of concerns. No guidance has yet been provided by the IRS on these issues. As a practical result, there is substantial flexibility as to how to apply the rules but little agreement as to the reliability of any selected methodology. 59

60 Strafford Sect. 704(c): Partnership and LLC Contributions Final Sect. 704(c) Anti-Abuse Regulation An allocation method (or combination of methods) is unreasonable if the allocation, either in a direct or reverse Sect. 704(c) context, results in a shifting of the tax consequences of built-in in gain or loss among the partners in a manner that substantially reduces the present value (PV) of the partners (or members ) aggregate tax liability. The final regulations amended the anti-abuse rule to provide that the tax effect of an allocation method (or combination of methods) on both direct and indirect partners must be considered. 60

61 Strafford Sect. 704(c): Partnership and LLC Contributions Final Sect. 704(c) Anti-Abuse Regulation (Cont.) Indirect partners An indirect partner is any direct or indirect owner of a partnership, S corporation or controlled foreign corporation, or direct or indirect beneficiary of a trust or estate, that is a partner in the partnership; and any consolidated group of which the partner in the partnership is a member per Treas. Reg (h). A CFC shareholder is treated as an indirect partner only for allocation of items that: (1) enter into the computation of a U.S. shareholder s inclusion for the CFC, (2) enter into any person s s income attributable to a U.S. shareholder s s inclusion under Sect. 951(a), or (3) would enter into these computation if the items were allocated to the CFC. 61

62 Strafford Sect. 704(c): Partnership and LLC Contributions Final Sect. 704(c) Anti-Abuse Regulation (Cont.) The final regulations also provide that the principles of Sect. 704(c), together with the allocation method, only apply to contributions of property to the partnership. In determining if a purported contribution of property to a partnership should be recast to avoid results that are inconsistent with subchapter K, one factor that is relevant is the use of the remedial method in which allocations of remedial items of income, gain, loss or deduction are made to one partner, and allocations of offsetting remedial items are made to a related partner. 62

63 To ensure compliance with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any U.S. Federal tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding taxrelated penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party the tax-related matters addressed herein. 63