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U.S. Income Tax Law |
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Attorney at Law |
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Partnership Special Allocation Structures Many tax strategies seek to maximize tax savings and generate them for transaction parties that have a high tax rate. Very often, those same parties provide financing in the form of debt and/or equity and insist on receiving priority cash returns
Partnership structures in which the lessee is unrelated to the partners can create attractive after-tax yields for the tax-based partner, compared to a direct investment, by allocating tax deductions to the partner in excess of its capital account balance pursuant to a capital account deficit restoration obligation ("DRO"). See Lease Modeling Expertise. DRO’s have been utilized in big-ticket leasing transactions. The financial risk of DRO’s can be ameliorated with pooled collateral, high credit-quality lessees, third-party lease guarantees and/or credit support provisions such as letter of credit requirements. |
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A straightforward way of accomplishing these results,
one which has clearly been envisioned by Congress, is through a
partnership structure. The leased property and partnership debt financing
generate deductions that are generally well established under the
tax law. These deductions can be specially allocated among the
partners under regulations governing, among other things, the
validity of the special allocations and the determination of a
partner’s basis in its partnership interest.