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construction of the hotels principally through the use of
nonrecourse borrowing. For tax purposes, Landmark and Gateway
utilized accelerated depreciation methods. These methods reduced
the partnerships’ tax bases in the hotel properties to amounts that
were less than the amount of debts the partnerships had incurred to
construct those properties.
Mr. Manchester formed IHCL to hold 35.354-percent limited
partnership interests in Landmark and Gateway. Under the Agreement
of Limited Partnership of IHCL, dated October 3, 1985 (the IHCL
Original Agreement), Mr. Manchester held a .001-percent interest in
IHCL. THEI held a 99.999-percent interest, both as a general and
limited partner.
In November 1985, Dondi Properties (Dondi), which was then
controlled by Vernon Savings and Loan Association (Vernon),
invested in IHCL. Dondi received a 15-percent limited partnership
interest in IHCL in exchange for its agreement to contribute $19.8
million to IHCL. Mr. Manchester then withdrew as a partner in
IHCL. Following this transaction, THEI held an 85-percent interest
in IHCL (an 84-percent limited partnership interest and a 1-percent
interest as the general partner).
Dondi’s entry into IHCL was reflected in a “Restated and
Amended Agreement of Limited Partnership of IHCL”, dated November
29, 1985 (the IHCL Restated Agreement). That agreement allocated
99 percent of IHCL’s net losses to Dondi, and 1 percent to THEI as
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