Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 9

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          partnership interests. This reallocation of losses created the              
          substantial deficit balance in THEI's capital account with IHCL.            
          Marriott Corp.                                                              
               In October 1987, the Marriott Corp. became a partner in PLH            
          and PGL.  It contributed cash and made loan guaranties to those             
          partnerships in exchange for a 5-percent general partnership                
          interest in each. Marriott also received an allocation of 95                
          percent of net losses from PLH and, initially, 99 percent of net            
          losses from PGL.  These allocations reduced the losses previously           
          allocated to IHCL. The allocation of income, however, remained              
          unchanged.                                                                  
               With regard to IHCL, 99 percent of that partnership's income           
          continued to be allocated to Dondi.  At the end of 1987, THEI had           
          a total deficit in its capital account of $5,010,171, while Dondi           
          had a positive capital account of $7,763,183, as a result of these          
          reallocations.  At the beginning of 1991, the capital accounts of           
          IHCL indicated a negative capital account totaling $5,920,614 for           
          THEI and a positive capital account of $14,879,392 for Dondi.               
          Transfer to FDIC and Mr. Manchester                                         
               On June 20, 1991, pursuant to ongoing settlement negotiations,         
          Dondi transferred its 15-percent limited partnership interest in            
          IHCL to the Federal Deposit Insurance Corporation (FDIC), as                
          receiver for Vernon. FDIC then transferred this interest in IHCL to         
          Mr. Manchester in exchange for his $5 million payment. A first              
          amendment to the IHCL Restated Agreement, dated June 20, 1991,              




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