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Petitioners’ Federal income tax return for 1987, the only year
petitioner did legal work for Finley Kumble clients, reported a
distributive share of partnership income that was substantially
exceeded by the partnership draws he actually received from
Finley Kumble during that year. Finley Kumble announced its
dissolution late in 1987 and was declared bankrupt early the next
year without petitioner’s having made any capital contribution to
the firm.
Respondent has explained that under the closing agreement
between the IRS and the Finley Kumble bankruptcy trustee that
concluded the Finley Kumble partnership-level TEFRA proceeding,
COD income was allocated to petitioner and all other partners
using a two-step process. After taking into account the capital
contribution of $15,000 that petitioner was required to make in
the Finley Kumble bankruptcy proceeding, over 10 years, with
interest at 10 percent, including the present value of the future
interest payments on the deferred installments thereof,
petitioner still had a negative capital account of $26,099. In
the first step of the COD income allocation, petitioner was
allocated $26,099 of COD income to reduce his negative capital
account to zero. Finley Kumble’s remaining COD income, after
accounting for step-one COD income allocations to petitioner and
other partners with negative capital accounts, was $26,580,484.
In the second step, Finley Kumble allocated the remaining COD
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