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the loss disallowance rules prescribed in section 1.1502-20, Income
Tax Regs., are invalid.
After reporting $337,343,455 as its distributive share of
Salina’s net short-term capital gain for the period December 28
through 31, 1992, FPL added that amount to its original capital
investment in Salina ($73,890,327) to arrive at a total outside
basis in the partnership of $411,804,596. FPL later adjusted its
basis to account for its distributive share of Salina’s items of
income and expense for the taxable years 1993 and 1994, as well as
the value of the cash and mortgaged-backed securities that Salina
distributed to FPL in liquidation of its interest in November 1994.
As of November 30, 1994, FPL claimed an adjusted tax basis in
Salina of $339,631,665, which it allocated to the mortgage-backed
securities. As FPL received payments on the mortgage-backed
securities during 1994, 1995, 1996, and 1997, FPL reported ordinary
losses (determined by computing the excess of its basis in those
assets over the amount realized) in the amounts of $1,101,833,
$14,107,759, $212,280,777, and $112,000,000, respectively.
V. FPAA
As previously stated, respondent issued an FPAA setting forth
adjustments to Salina’s partnership return for the period ending
December 31, 1992. Relying on alternative theories, respondent
disallowed $343,900,151 of the $344,234,365 net short-term capital
gain that Salina reported for the taxable year ending December 31,
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