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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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