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Dondi through June 20, 1991, the date Dondi’s interest was
transferred to Mr. Manchester. The 1991 return further reflected
that, after June 20, 1991, 100 percent of IHCL’s net income was
allocated to THEI.
Respondent challenged the allocation of 100 percent of IHCL’s
net income to THEI; respondent determined that for the period after
June 20, 1991, Mr. Manchester should be allocated a portion of
IHCL’s net income. Specifically, respondent determined that Mr.
Manchester’s distributive share of IHCL’s net income should be
increased by $814,296 and that his share of tax preference items
should be increased by $23,490. This reallocation of IHCL’s net
income reflects the pre-June 20, 1991, 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.”
In Interhotel Co. I, we held that the allocation of 100
percent of IHCL’s net income for 1991 to THEI lacked substantial
economic effect and was inconsistent with the partners’ interests
in the partnership. Accordingly, we sustained respondent’s
reallocation of the majority of that income to Mr. Manchester. On
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