The American Institute of CPAs (AICPA) sent a draft revenue ruling on the use of partnership target allocations methodology to the Internal Revenue Service (IRS) and Department of the Treasury on Feb. 11, 2014 urging that the IRS adopt it in order to eliminate confusion.
In its cover letter, the AICPA said, “We believe guidance on partnership target allocations methodology is necessary because of its widespread use and the misunderstanding of many people that the government has approved this approach by acquiescing in its use.”
Target allocations are a common method used in allocating partnership items of income, gain, loss, deductions and credits among partners of partnerships. While popular, use of this method runs the risk of being inconsistent with the economic effect rules set forth in the Internal Revenue Code. And, because there is not clear guidance in the area, they are frequently misused.