Interhotel Company, LTD., Torrey Hotel Enterprises, Inc., Tax Matters Partner - Page 18

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          income and gain, to a partner who has an unexpected negative                
          capital account, either as a result of partnership operations or as         
          a result of making the adjustment for reasonably expected                   
          reductions.  The QIO must operate "in an amount and manner                  
          sufficient to eliminate such deficit balance as quickly as                  
          possible."  Sec. 1.704-1(b)(2)(ii)(d), flush language, Income Tax           
          Regs.                                                                       
               In the present case, neither the IHCL Original Agreement nor           
          the IHCL Restated Agreement contains a provision requiring capital          
          account adjustments for reasonably expected distributions or a              
          "qualified income offset".  To be sure, the second amendment to the         
          IHCL Restated Agreement does provide for a net income allocation to         
          pay off THEI's deficit capital account. However, the second                 
          amendment falls short of the requirements for a QIO. The second             
          amendment allocates only net income, not "a pro rata portion of             
          each item of partnership income", allocated "in an amount and               
          manner sufficient to eliminate such deficit balance as quickly as           
          possible." Sec. 1.704-1(b)(2)(ii)(d), Income Tax Regs.  Thus, the           
          second amendment was not designed to provide a prompt repayment of          
          unforeseen negative capital accounts. Rather, the partners are              
          permitted to accumulate very large deficit accounts over a number           
          of  years.  Petitioner  does  not  seriously  argue  otherwise.             
          Consequently, the IHCL partnership allocations fail to meet the             
          alternative test of economic effect.                                        






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