Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 10

                                        -10-                                          
          admitted Mr. Manchester as a substitute limited partner.  Dondi's           
          positive capital account was also transferred to FDIC and then to           
          Mr. Manchester.  As a result, THEI held a 1-percent interest as             
          general partner and an 84-percent interest as a limited partner.            
          Mr. Manchester held the remaining 15 percent in limited partnership         
          interests.                                                                  
               The following day, the parties executed a second amendment to          
          the IHCL Restated Agreement.  The second amendment provided that            
          IHCL's income would be allocated first to the partners who had              
          negative capital account balances and, thereafter, to the partners          
          pro rata.  The second amendment, however, made no pertinent changes         
          to the preexisting allocation of gain, allocation of loss,                  
          distribution of cash-flow from operations, distribution of cash             
          from sale or refinancing, or liquidating distributions.                     
          IHCL's 1991 Return                                                          
               Following execution of the second amendment, 100 percent of            
          IHCL's income was allocated to THEI, in view of its negative                
          capital account.  IHCL accordingly filed a 1991 information return,         
          reporting the allocation of 99 percent of net income to Dondi               
          through June 20, 1991, the date Dondi's interest was transferred to         
          Mr. Manchester.  The 1991 return reflected that, after June 20,             
          1991, IHCL had allocated 100 percent of its income to THEI.                 
          The FPAA                                                                    
               Respondent did not accept the allocation of the second                 
          amendment to the IHCL Restated Agreement to the extent that 100             




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