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Moreover, we do not agree with petitioners' factual
assertion that the settlement transaction with Admiral took
place outside the partnership. To the contrary, the use of
the investor notes as collateral for a loan from Northern
Telecom and the involvement of Admiral as guarantor of the
partnership’s obligation to the lender was contemplated in
the offering memorandum, the partnership agreement, the
letter to Northern Telecom executed by each investor, and
by the investor notes themselves. Additionally, under the
Settlement Agreement, the transaction was structured as an
abandonment of an investor’s partnership interest to the
partnership or as a conveyance of an investor’s partnership
interest to the partnership. Contrary to petitioners'
assertion that the investor notes “were not partnership
assets but were assets owned by Admiral”, the balance
sheets filed as Schedule L attached to the partnership’s
Form 1065, U.S. Partnership Return of Income, list the
investor notes as partnership assets. Furthermore,
contrary to petitioners’ assertion that the settlement did
not require the consent or notification of the partnership,
the Settlement Agreement itself required the execution of
an agreement between the trustee in bankruptcy and the
limited partners who joined the settlement, and further
required the settlement transaction to be approved by the
Bankruptcy Court.
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