Michael W. and Charlotte S. Phillips - Page 11

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               In the settlement that respondent reached with Ethanol, the            
          investment credit at issue was, for the most part, allowed.                 
          Petitioners do not argue that this credit was not properly                  
          allowed or that their distributive share of the allowable credit            
          was improperly computed.  There is no basis in the record for               
          concluding otherwise than that the treatment of the investment              
          credit on petitioners’ original return was proper to the extent             
          allowed by respondent, and that the treatment on their amended              
          return was improper.                                                        
               Petitioners challenge the substance of respondent’s                    
          determination only on the ground that when they filed their                 
          bankruptcy petition in December 1992, partnership items on their            
          return converted automatically to nonpartnership items by                   
          operation of law, pursuant to section 6231(b)(1)(D) and (c)(2)              
          and section 301.6231(c)-7T, Temporary Proced. & Admin. Regs.,               
          52 Fed. Reg. 6793 (Mar. 5, 1987).  This conversion had the                  
          following effects, in their view.  First, “Any TEFRA proceeding             
          making a determination of the proper treatment of partnership               
          items has no effect on the treatment of non-partnership items.”             
          Therefore the prospective settlement with Ethanol on which                  
          respondent relied in determining petitioners’ deficiency was                
          entirely irrelevant to their liability.  Second, the conversion             
          of the investment credit to a nonpartnership item effectively               
          eliminated the requirement that petitioners’ treatment conform to           
          the partnership level treatment of this item.                               
               These arguments are based on a number of misconceptions.               
          The regulations provide for conversion of partnership items to              



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