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Ran Chen, EA, CFP®

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Enrolled Agent Exam [Part 2] 07, Partnership Allocations — §704(b) Substantial Economic Effect

5/4/2026 • 3 min

This podcast is made by Ran Chen, who holds an EA license, Insurance and Securities licenses (Series 6, 63, 65), and the CFP® designation. He is passionate about opening access to high-quality exam preparation resources and helping learners prepare more effectively for professional certification exams. In this episode you will learn: - That partnership allocations are respected only if they have "substantial economic effect"; otherwise, they are reallocated based on the partner's interest in the partnership (PIP). - The first pillar of economic effect: The partnership must maintain capital accounts strictly according to Treasury regulations. - The second pillar of economic effect: Upon liquidation, all distributions must follow the partners' final positive capital account balances. - The critical third pillar of economic effect: A partner creating a deficit capital account must have an unconditional obligation to restore that deficit (a DRO). - To identify common exam traps, such as special allocations of depreciation to a limited partner who lacks a DRO, which invalidates the allocation. For more free exam prep tools, practice questions, and AI-powered explanations, visit https://open-exam-prep.com/ or YouTube Channel: https://www.youtube.com/@Open-exam-prep

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