-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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