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defined Mr. Blonien as the “partner”. Mr. Blonien entered into
the settlement agreement because the settlement amount was less
than the legal cost he would have incurred in defending against
the trustee’s claim.
On September 21, 1993, Finley Kumble filed its 1992 Form
1065, U.S. Partnership Return of Income. On this return, which
was signed on behalf of Finley Kumble by Mr. Musselman as
trustee, the firm reported that it had 280 partners, including
Mr. Blonien. On the face of the return at line 7, Other income
(loss), Finley Kumble referenced “SEE STATEMENT 1", which was a
Form 8275, Disclosure Statement, containing an Item 2
“CANCELLATION OF INDEBTEDNESS $55,777,452"; Statement 2 to the
return indicated that this amount had been included in “OTHER
INCOME INCLUDED IN SCHEDULE M-1, LINE 9: INCOME FROM
CANCELLATION OF DEBT.” The last paragraph of the attachment to
the Disclosure Statement states as follows:
On December 9, 1991, the Bankruptcy Court entered
an order confirming the Chapter 11 plan proposed by the
Trustee, with certain amendments (“Plan”). This order
became final and non-appealable in February, 1992 and
the Plan became effective on March 19, 1992 (“Effective
Date”). In the Closing Agreement being negotiated with
the Internal Revenue Service (“IRS”), it is expected
that the Trustee will stipulate the amount of
cancellation of indebtedness income (“COD”) to be
$55,777,452. This COD has been calculated using
various estimates and methods as requested by the IRS.
The COD has been determined using the assets of the
Partnership at the beginning of 1992, the expected
contributions of all the Finley partners, and the
estimate of the allowed claims in their appropriate
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