Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 8

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          establish reserves.  Thereafter, section 5.3.4 of the IHCL Restated         
          Agreement directed liquidation proceeds to go--                             
                    To the payment to the Partners, who have positive                 
               capital account balances, in proportion to their positive              
               capital account balances, of an amount equal to the sum                
               of the positive balances in the Partners' capital                      
               accounts as of the date of such distribution, after                    
               giving effect to all contributions, distributions and                  
               allocations of Net Income, Net Loss and Gain for all                   
               periods, including the period during which such                        
               distribution occurs.                                                   
               As of December 31, 1985, THEI had a beginning capital account          
          value of zero.  For 1986, it had a negative capital account value           
          or balance of $1,701,520 for both its general and limited                   
          partnership interests.  For the next 5 years, its negative capital          
          account balance consistently exceeded $5 million.  During the year          
          at issue, THEI did not have a positive capital account balance.             
               By January 1986, Dondi had contributed $10.8 million to IHCL           
          and agreed to pay the $9 million balance in subsequent quarterly            
          installments.  Dondi, however, encountered difficulties and failed          
          to make its payment due January 6, 1987. Accordingly, in April              
          1987, THEI gave Dondi written notice, under section 4.3.4.2(d) of           
          the IHCL Restated Agreement, that Dondi's allocation of 99 percent          
          of IHCL's losses was terminated.  The IHCL Restated Agreement then          
          allocated the net losses of IHCL to the partners pro rata in                
          accordance with their partnership interests.  Thereafter, 15                
          percent of the losses were allocated to Dondi, reflecting its               
          limited partnership interest, and 85 percent of the losses were             
          allocated to THEI, reflecting both its general and limited                  




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