Capital Gain Allocations

Definition

A capital gain allocation is the share of a partnership's or fund's capital gains assigned to each partner, which each partner reports separately and is taxed on whether or not cash is distributed.^[1] The partnership agreement sets each partner's share^[2], but an allocation that lacks substantial economic effect is disregarded and the share is instead determined by the partner's interest in the partnership.^[3]

Federal law

1. Internal Revenue Code of 1954, Pub. L. 83-591, ch. 736, § 702, 68A Stat. 3, 239. Internal Revenue Code § 702(a): each partner separately takes into account its distributive share of partnership capital gains and losses. Official text: govinfo.gov, U.S. Government Publishing Office.
2. Internal Revenue Code of 1954, Pub. L. 83-591, ch. 736, § 704(a), 68A Stat. 3, 240. Internal Revenue Code § 704(a): distributive shares are determined by the partnership agreement. Official text: govinfo.gov, U.S. Government Publishing Office.
3. Tax Reform Act of 1976, Pub. L. 94-455, § 213(d), 90 Stat. 1520, 1548. Rewrote 26 U.S.C. § 704(b): allocations without substantial economic effect are determined by the partner's interest in the partnership. Official text: govinfo.gov, U.S. Government Publishing Office.