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Section 708 governs termination of a partnership for
Federal income tax purposes. Section 708 provides that a
partnership shall be considered terminated only if: (1) No
part of any business, financial operation, or venture of
the partnership continues to be carried on by any of its
partners in a partnership; or (2) within a 12-month period
there is a sale or exchange of 50 percent or more of the
total interest in partnership capital and profits. See
sec. 708(b)(1). Section 708 provides that a partnership
"shall be considered as continuing if it is not
terminated." Sec. 708(a).
It is undisputed that after James excluded Darwin from
the partnership in 1986, James continued to carry on the
animal farm business until some time after December 31,
1993. It is also undisputed that neither James nor Darwin
sold or exchanged his interest in the partnership.
Therefore, we have no basis to find that either of the
events specified by section 708 took place before 1994,
such that the partnership terminated for Federal tax
purposes before or during the tax years in issue.
Having disposed of the above preliminary matters, we
turn to the principal issue for decision in these cases:
the manner of allocating the partnership's income for the
years in issue. In order to put this issue in context, we
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