Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 11

                                        -11-                                          
          percent of partnership income was allocated to THEI. Rather,                
          respondent determined that Mr. Manchester should be allocated 99            
          percent of IHCL's net income for the period after June 20, 1991.            
          Accordingly, respondent proposed that Mr. Manchester's distributive         
          share of IHCL's income be increased by $814,296 and that his share          
          of tax preference items be increased by $23,490.  The reallocation          
          of income reflects the original allocation of income and losses to          
          Dondi: 1 percent to THEI and 99 percent to Mr. Manchester, as               
          Dondi's successor.  The FPAA stated that "the adjustments in the            
          distributive shares are determined in accordance with the partners'         
          interest in the partnership as the partnership has not shown that           
          the allocation per the return is an allowable allocation under the          
          provisions of the Internal Revenue Code."                                   
                                      OPINION                                        
               In order to determine whether IHCL's allocation of the                 
          partnership items at issue either has substantial economic effect           
          or is consistent with the partners' interests in the partnership,           
          we must preliminarily review  several  basic  principles  of                
          partnership taxation.                                                       
          I.  Partnership Taxation                                                    
          A.  General Principles                                                      
               Section 701 provides that a partnership is not liable for              
          Federal income taxes; instead, persons carrying on business as              
          partners are liable in their separate or individual capacities for          
          the income taxes arising from partnership  operations.  In                  




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