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a demand note in the amount of $585,511,25 without interest,
dated July 1, 1987.
The demand note bore endorsements that were recorded by
journal entries as capital distributions from MIT 86 to its
partners and then as payments on their notes to Qulart. As a
result of these endorsements, the notes were credited against the
partners' notes to Qulart, then applied as Qulart's payment of
its note to Machise. The partners in MIT 86 made no cash
payments in 1987 on their notes to Qulart.
For the year 1987, MIT 86 changed its method of accounting
from the cash method to the accrual method. On its partnership
return for 1987, MIT 86 reported partnership taxable income of
$4,855,505, which consisted of $4,652,314 (the deferred income
that it reported due to the change in accounting method), plus
$203,191, which it called fee income and which represented the
accrual of interest payable from MPC, and no expenses.
For the year 1987 Fred, as vice president of BBPA, the tax
matters partner of MIT 86, has filed an amended Form 1065 as a
protective administrative adjustment request. Therein he seeks
to have the income reported by MIT 86 for the year 1987 reduced
to zero, in the event that we determine MIT 86 to be a sham, not
entitled to deduct the losses claimed for 1986. The claim is
25The amount of $585,511 appearing on the note was incorrect
and should have been $588,511. The transaction was recorded on
the books of MIT 86 and MPC in the amount of $588,511.
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