-108-
through to Imperial and $4,097,577 of which flowed through to SMP
and then to Somerville S Trust.78
The core issue is whether respondent has properly
disallowed these claimed losses. Petitioner’s claims to the
losses rest on the partnership tax rules, which are contained in
subchapter K (secs. 701 to 777) of the Code. Although the
operation of these rules is not directly in dispute, the effects
of these rules permeate the transactions in question and inform
our analysis. We start with an overview of these rules.
I. Partnership Tax Rules
A. In General
A partnership is not subject to Federal income tax at the
partnership level; instead, persons carrying on business as
partners are liable for income tax only in their separate or
individual capacities. Sec. 701; see secs. 702, 704 (providing
rules for determining partners’ distributive shares), sec. 703
(providing rules for computing taxable income of a partnership).
A partner must take into account his or her distributive share of
each item of partnership income, gain, loss, deduction, and
78 Mr. van Merkensteijn paid $120,000 and gave a $1,024,000
note (revised to $1.180 million) in exchange for the $79 million
receivable. Mr. van Merkensteijn paid $205,191 principal and
$82,600 interest on this note. He paid no additional amounts.
Imperial paid $14,595,652 as a fee for the tax losses that it
received from the Corona transaction.
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