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bankruptcy estate held beneficial ownership of the partnership
interests as of the close of the various partnership taxable
years, it is incumbent upon petitioners to identify an exception
to the section 706(a) general rule in order for the prepetition
partnership losses to be allocated to Mr. Katz in his individual
capacity. In this regard, petitioners offer section 706(d)(1).
Petitioners argue that the varying interests rule under
section 706(d)(1) was triggered when Mr. Katz filed his chapter 7
petition in bankruptcy. Section 706(d)(1), enacted as part of
the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369, sec.
72, 98 Stat. 494, 589, provides in pertinent part as follows:
(1) In general.–- * * * if during any taxable year
of the partnership there is a change in any partner’s
interest in the partnership, each partner’s
distributive share of any item of income, gain, loss,
deduction, or credit of the partnership for such
taxable year shall be determined by the use of any
method prescribed by the Secretary by regulations which
takes into account the varying interests of the
partners in the partnership during such taxable year.
[Emphasis added.]
In particular, petitioners contend that Mr. Katz experienced a
“change in interest” under section 706(d)(1) when his ownership
interests in the partnerships were extinguished by the operation
of 11 U.S.C. sec. 541(a)(1). The argument follows that each
partnership was required under section 706(d)(1) to make an
allocation in respect of Mr. Katz’ extinguished interest.
Respondent contends that section 706(d)(1) has no
application to a transfer of a partnership interest pursuant to
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