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interest over 10 years, which still left him with a negative
capital account.
As a general rule, absent an agreement to the contrary, a
partner will be liable to a partnership to the extent of such
partner’s negative capital account balance upon dissolution of
the partnership. See sec. 1.704-1(b)(2)(ii)(b)(3), (c), Income
Tax Regs.
For tax and accounting purposes, Finley Kumble first
allocated COD income to petitioner and other partners to reduce
their negative capital accounts and then allocated the remaining
COD income to petitioner and all other partners in proportion to
their contributions to the partnership under the bankruptcy plan.
The restoration of the balance of petitioner’s negative capital
account was accomplished by the first-step allocation of the
partnership’s COD income resulting from the discharge of its
debts in the bankruptcy proceeding; the second-step allocation
allocated the remaining COD income to petitioner and the other
partners in proportion to their capital contributions.
All in all, the partnership-level TEFRA proceeding seems to
have led to a sensible tax result insofar as petitioner is
concerned. In 1987, petitioner realized tax benefits from Finley
Kumble in the form of losses that reduced his distributive share
of partnership income to less than his actual distributions
received, which was a contributing factor in causing his capital
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