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The operation of the MIT 80 Termination Agreement may be
depicted as follows:
Owed by MPC to MIT 80 as unpaid $2,401,416
compensation fee
Owed by MPC to MIT 80 as Contract 301,319
Renegotiation fee
Credited by MPC to MIT 80 as assignment (1,407,627)
of partners' notes to Machise
Amount still owed MIT 80 by MPC 1,295,108
Partnership Income of MIT 80
In 1985 and 1986, MIT 80 reported net partnership taxable
income of $443,415, reflecting the receipt of the notes (bearing
no interest) from Machise, and treating them as the equivalent of
cash.
For the year 1987, MIT 80 changed its method of accounting
from the cash method to the accrual method.9 On its partnership
return for 1987, MIT 80 reported partnership taxable income of
$840,838, consisting of $667,997 (one-fourth of the $2,671,990
deferred income that it was allocating over 4 years due to the
change in accounting method), plus $241,590.43, shown as late fee
9In a statement attached to the Form 3115 in which MIT 80
changed its method of accounting, BBPA explained that MIT 80 was
a "tax shelter as defined in Section 461(i)(3)". As such, it was
precluded from using the cash method after Dec. 31, 1986. BBPA
further indicated that MIT 80's "accrued but not received" income
was $2,671,990. Under the pertinent regulations, sec. 1.448-
1T(g)(2)(i), Temporary Income Tax Regs., 52 Fed. Reg. 22772 (June
16, 1987), it was required to take this amount into account
ratably over the next 4 years. If it ceased business before the
end of those 4 years, it was to take the entire balance into
account for its last taxable year. Sec. 1.448-1T(g)(3)(iii),
Temporary Income Tax Regs., 52 Fed. Reg. 22773 (June 16, 1987).
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