Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 2

                                         -2-                                          
                    D encountered financial difficulties.  In 1987, the               
               special allocation of gains and losses to D was                        
               terminated.  Thereafter, the gains and losses of IHCL                  
               were allocated to THEI and D pro rata in accordance with               
               their partnership interests. Following this allocation,                
               a substantial deficit balance existed in THEI's                        
               partnership capital account.                                           
                    On June 20, 1991, M purchased D's interest in IHCL                
               and thereafter succeeded to D's then-positive partnership              
               capital account of $14.8 million.  At that time, THEI had              
               a negative $5.9 million partnership capital account.                   
                    Upon M's reentry into IHCL, IHCL's partnership                    
               agreement was amended to provide that IHCL's income would              
               be allocated first to partners having negative capital                 
               account balances and then to the partners pro rata.  No                
               amendment was made to IHCL's partnership agreement with                
               respect to the allocation of losses, distributions of                  
               cash-flow, or liquidating distributions.                               
                    IHCL's 1991 information return reported an                        
               allocation of 99 percent of IHCL's income to D up to June              
               20, 1991, and thereafter an allocation of 100 percent to               
               THEI.  Respondent determined that 99 percent of IHCL's                 
               income after June 20, 1991, should be reallocated to M as              
               D's successor in IHCL.                                                 
                    Held:  Respondent's reallocation of 99 percent of                 
               IHCL's income to M for the period in issue is sustained.               
               See sec. 704(b), I.R.C.                                                


               J. Clancy Wilson, for petitioner.                                      
               Paul B. Burns and Gretchen A. Kindel, for respondent.                  


                       MEMORANDUM FINDINGS OF FACT AND OPINION                        

               JACOBS, Judge:    Respondent  issued  a  notice  of  final             
          partnership administrative adjustment (FPAA) on April 11, 1995.  In         
          relevant part,1 respondent proposed increasing by $814,296 the              

          1         In addition to the amounts at issue, respondent also              
          determined that Interhotel Co., Ltd., the partnership whose                 
                                                             (continued...)           




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