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purchase Smith and Fowler’s interests prior to September 30,
1989, Smith and Fowler would be obligated to purchase
petitioner’s interest for $2,370,000. By letter dated November
16, 1989, Smith and Fowler informed petitioner that they would
purchase his interest pursuant to the 1989 agreement. No
provision in the 1989 agreement, however, precluded petitioner
after January 12, 1989, from participating in the affairs of the
partnership.
On June 30, 1990, petitioner, Smith, and Fowler executed a
purchase agreement (1990 agreement) providing for the transfer of
petitioner's interest to Smith and Fowler for $2,570,000. The
1990 agreement recharacterized the $200,000 paid pursuant to the
1989 agreement as part of the purchase price. The parties
executed a $2 million promissory note with the balance of the
purchase price (i.e., approximately $370,000) to be paid at
closing.
In 1990, petitioner sought a distribution to cover his 1989
tax liabilities relating to his distributive share of partnership
income. Prior to 1989, the only distributions made to
petitioner, Smith, and Fowler were to assist them in paying their
tax obligations resulting from their distributive shares of
partnership income. In 1989 and 1990, however, the partnership
used most of its income to make payments relating to its receipt
of a $20 million loan and made no distributions.
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