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contrary by his attorney in 1998. In fact, title to the property
was never formally transferred to the partnership.
From the inception of the partnership in 1982 to the sale of
the ranch in 1988, the partnership operated as if it owned the
ranch. The partnership paid the expenses of operating the ranch
and claimed them as deductions on its Federal partnership tax
returns. The partnership listed the ranch and all improvements
thereon as assets on its partnership tax returns and depreciated
the improvements. Petitioner signed each partnership tax return.
The partnership was not profitable. From 1982 to 1987,
petitioners claimed flowthrough losses from the partnership
totaling $695,047 on their individual income tax returns. To
keep the partnership afloat, petitioner and one of the other
partners made several additional capital contributions during
this period. Finally, in 1988, the partnership’s financial
problems came to a head because Mr. and Mrs. Lentz refused to
modify the payment obligations under the promissory note and the
deed of trust and threatened to foreclose on the ranch.
In October 1988, petitioners and the other two couples
entered into a purchase and sale agreement in which they agreed
to sell the ranch to Cele and Norma Pou (Mr. and Mrs. Pou). As
consideration for the sale, Mr. and Mrs. Pou paid each couple
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