                       123 T.C. No. 4



                UNITED STATES TAX COURT



          HARBOR COVE MARINA PARTNERS PARTNERSHIP,
   ROBERT A. COLLINS, A PARTNER OTHER THAN THE TAX
MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL
                  REVENUE, Respondent



Docket No. 13267-02.                Filed July 15, 2004.



     H is a general partnership, its managing partner
is S, and its other two partners are M and P. H’s
business activity is primarily the operation of a
marina in San Diego, California. On account of
dissension that consistently occurred between S and P
as to H’s operation of the marina, S, in its capacity
as H’s managing partner, dissolved H, distributed the
marina to S or to an S affiliate, distributed to P a
check in the amount of the value of P’s interest in H
as ascertained using a $16.5 million appraised value
for the marina, and reported to R that H had
terminated. S’s actions, all of which occurred in
1998, violated H’s partnership agreement which required
that H’s managing partner sell the marina publicly to
the highest bidder in the event of a dissolution and
that the proceeds of the sale be distributed to the
partners in accordance with the interests stated in the
agreement. P disavowed that H had terminated, sued S
                               - 2 -

     to compel S to abide by the partnership agreement, and
     deposited with the trial court the check that P had
     received from H. In 2000, the trial court declared
     that the partnership agreement required that S sell the
     marina publicly to the highest bidder, but decided that
     P’s sole remedy for S’s violation of that agreement was
     to withdraw the funds on deposit. P withdrew those
     funds shortly thereafter. In 2002, upon appeal of the
     trial court’s judgment, the court of appeal ordered
     that the marina be sold and that the proceeds be
     distributed in accordance with the partnership
     agreement. In 2003, after the marina had been sold for
     $25.5 million, but before any distribution of the
     resulting proceeds, the trial court decided upon remand
     that P’s withdrawing of the funds formerly on deposit
     meant that the court of appeal’s order was without any
     legal basis and that the final judgment in P’s lawsuit
     was the trial court’s judgment stating that P was only
     entitled to the withdrawn funds. The trial court’s
     latest decision is back on appeal before the court of
     appeal.
          Held: Pursuant to sec. 708(b)(1)(A), I.R.C., H
     did not terminate for Federal tax purposes during 1998;
     as of the end of that year, H’s winding up of its
     affairs in complete cessation of its business operation
     was dependent on the resolution of P’s lawsuit as to
     the failure of S to follow the procedures by which the
     partners of H had agreed that H’s operation would be
     terminated, and P’s lawsuit, when resolved, could have
     under the partnership agreement reasonably resulted in
     H’s realization of significant income, credit, gain,
     loss, or deduction after 1998.



     W. Alan Lautanen, for petitioner.

     Karen Nicholson Sommers, for respondent.



                              OPINION


     LARO, Judge:   This case is a partnership proceeding subject

to the unified audit and litigation procedures of the Tax Equity
                                - 3 -

& Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248,

96 Stat. 324, 628.   It is currently before the Court for decision

without trial.   See Rule 122; see also sec. 6226(b).1   When the

tax matters partner of Harbor Cove Marina Partners (HCMP) did not

petition this Court under section 6226(a) within the 90-day

period stated therein, Robert A. Collins (Collins), a notice

partner of HCMP, petitioned the Court under section 6226(b) to

readjust partnership items relating to the Notice of Final

Partnership Administrative Adjustment (FPAA) issued by respondent

for HCMP’s 1998 taxable year.   The FPAA reflects respondent’s

determination that the “final” 1998 Form 1065, U.S. Partnership

Return of Income (1998 partnership return), filed by HCMP is

correct and that respondent would make no changes to it.

     Collins filed a personal 1998 Form 1040, U.S. Individual

Income Tax Return (1998 individual income tax return).    He

included in that return a Form 8082, Notice of Inconsistent

Treatment or Administrative Adjustment Request (AAR), as to four

positions taken by HCMP in its 1998 partnership return.    Collins

indicated on the Form 8082 that he was filing inconsistently with

those positions because they reflected HCMP’s erroneous belief

that it had terminated during 1998.     According to Collins, HCMP

continues to exist today pending the final outcome of his lawsuit

     1
       Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, section references are to
the applicable versions of the Internal Revenue Code.
                               - 4 -

(lawsuit) against HCMP’s managing general partner and others.

The lawsuit, which is currently before the California Court of

Appeal for the Fourth Appellate District (court of appeal), seeks

enforcement of a provision in HCMP’s partnership agreement (and a

directive of the court of appeal) that requires that HCMP sell

its assets in the public market rather than distribute those

assets to its managing general partner (or to an affiliate of

that partner), as was done at the time of HCMP’s reported

termination.

     Collins sets forth in his petition to this Court certain

allegations of error which he did not address on brief.     We

consider those allegations to be conceded.     We are left to decide

whether HCMP terminated during 1998.     We hold it did not.2

                            Background

     The facts in this background section are obtained from the

parties’ stipulation of facts, the exhibits submitted therewith,

and the pleadings.   HCMP is a general partnership whose principal

place of business was in San Diego, California, when Collins’s

petition to this Court was filed.



     2
       The parties also dispute whether Collins correctly
reported the other three “inconsistent positions” listed in his
Form 8082. We believe that we need not decide this dispute,
given our holding that HCMP was not terminated during 1998. If
either party disagrees, he should bring this to our attention
during the parties’ discussion of the computations to be
submitted to the Court under Rule 155.
                                 - 5 -

     HCMP was formed on April 8, 1985, under the Uniform

Partnership Act of California.    It is governed by a written

partnership agreement (partnership agreement) executed on that

date and entitled “Restated Partnership Agreement of Harbor Cove

Marina Partners”.   Among its purposes under the partnership

agreement are to acquire, own, commercially develop, and hold for

investment and the production of income a leasehold interest in

certain real property owned by the San Diego Unified Port

District (Port District).   Another purpose is to develop a marina

(marina) on that leasehold and to hold that marina for

investment.   Its term as stated in the partnership agreement

expires no later than December 31, 2020.

     HCMP’s partnership agreement was signed by (or, in the case

of a corporation, on behalf of) its initial partners; namely,

Collins, Charles B. Hope (Hope), Frank L. Hope, Jr. (Hope Jr.),

and a California corporation named Sunroad Marina, Inc. (Sunroad

corporation).   The partnership agreement stated that Sunroad

corporation was HCMP’s managing general partner and tax matters

partner, that Sunroad corporation owned a 70-percent interest in

HCMP, and that the other three partners each owned a 10-percent

interest in HCMP.   The partnership agreement stated that the

partners shared in each item of income, expense, gain, loss, and

credit in accordance with their ownership interests and that, on

liquidation and distribution, the shares of Collins, Hope,
                                - 6 -

Hope Jr., and Sunroad corporation were 12, 12, 12, and 64

percent, respectively.    The partnership agreement also stated as

to the partners’ business relationship extensive details on,

among other things, the manner in which HCMP shall acquire its

capital, the manner in which HCMP shall allocate its profits and

losses, the manner in which HCMP shall be dissolved, and the

manner in which HCMP shall be liquidated following its

dissolution.

     On or about January 30, 1987, HCMP agreed to lease from the

Port District 1,315,440 square feet of tideland area located on

Harbor Island Drive in San Diego, upon which HCMP would construct

the marina.    The underlying lease (marina lease) was signed by

each HCMP partner and stated that the tideland area was let for a

40-year period beginning February 1, 1987.    On or about March 16,

1988, the Mutual Life Insurance Company of New York (MONY) lent

$13.5 million to HCMP (MONY loan) to acquire and develop the

marina.   The MONY loan was nonrecourse, and it was secured by an

interest in the marina lease granted to MONY by HCMP.    Each HCMP

partner signed and executed in favor of MONY a single $13.5

million promissory note ($13.5 million promissory note), the

terms of which were governed and construed by California law.

     The partnership agreement provided that the managing general

partner had the sole right to manage HCMP’s business.    During

HCMP’s existence, Collins vigorously challenged many of the
                               - 7 -

decisions made by Sunroad corporation as to that business.    This

animosity led to Sunroad corporation’s suing Collins in San Diego

Superior Court in an attempt to compel a buyout of his HCMP

interest.   This litigation ended unfavorably to Sunroad

corporation.

     On or about November 19, 1996, Sunroad corporation assigned

its interest in HCMP to Sunroad Real Estate Holding Corporation

(Sunroad Real Estate) to reflect a change in name from the former

to the latter.   Approximately 8 months later, in or about August

1997, Hope and Hope Jr., sold their interests in HCMP to Marina

Holdings Partners, L.P. (Marina Holdings), a California limited

partnership that was formed on May 29, 1997.3   On or about

December 31, 1997, Sunroad Real Estate was liquidated, and its

HCMP interest was assigned to Sunroad Asset Management, Inc.

(Sunroad Asset), the general partner of Marina Holdings.4

Contemporaneous with the liquidation of Sunroad Real Estate,

HCMP’s partnership agreement was amended to reflect the

aforementioned assignment and sales and to reflect the fact that

(1) Marina Holdings as part of the sales assumed all HCMP

     3
       The parties refer to Marina Holdings as Marina Holding.
We use the former name because that is the name in which Marina
Holdings filed its 1998 partnership return.
     4
       The address of the principal place of business of Sunroad
Asset was the same San Diego address as that of HCMP, Sunroad
corporation, Marina Holdings, and a California general
partnership named Sunroad Marina Partners (Sunroad general
partnership).
                                - 8 -

obligations of Hope and Hope Jr., and accepted the partnership

agreement, and (2) Sunroad Asset as part of the assignment

assumed all HCMP obligations of Sunroad Real Estate and accepted

the partnership agreement.   As of the end of December 31, 1997,

HCMP’s partners were Sunroad Asset, Marina Holdings, and Collins,

and their ownership interests were 70, 20, and 10 percent,

respectively.   Sunroad Asset was at that time HCMP’s managing

general partner.

     On May 26, 1998, Sunroad Asset, in its capacity as HCMP’s

managing general partner, notified Collins that it had decided to

dissolve HCMP pursuant to paragraph 11 of the partnership

agreement.    Paragraph 11 stated in relevant part that HCMP “shall

be dissolved upon the * * * decision of the MGP [managing general

partner] * * * [or] * * * The sale of all or substantially all of

the Partnership assets and collection of all monies due

therefrom”.   The notification also stated that paragraph 12 of

the partnership agreement directed Sunroad Asset, as HCMP’s

managing general partner, to wind up and liquidate HCMP by

selling its property and by applying and distributing those

proceeds in the manner described in the partnership agreement.

Paragraph 12, entitled “LIQUIDATION”, stated in relevant part:

          12.1. In the event of a dissolution as
     hereinabove provided, the Partnership shall forthwith
     be dissolved and terminated, and any certificates or
     notices thereof required by law shall be filed or
     published by the Liquidator (as defined below). The
     MGP * * * shall wind up and liquidate the Partnership
                               - 9 -

     by selling the Partnership property. The proceeds of
     liquidation and any other assets of the Partnership
     shall be applied and distributed in the following order
     of priority:

               12.1.1. To the extent of debts and
     liabilities of the Partnership * * * and the expense of
     liquidation;

               12.1.2. To the setting up of any reserves
     that the Liquidator may deem reasonably necessary for
     any contingent or unforeseen liabilities or obligations
     of the Partnership * * *;

               12.1.3. To the payment of any loans or
     advances (including interest thereon) that may have
     been made by any of the Partners;

               12.1.4. To the Partners in accordance with
     their respective capital accounts; and

               12.1.5. Any balance then remaining shall be
     distributed to the Partners in proportion to their
     respective interest in the Partnership.

Sunroad Asset later informed Collins that it intended to

distribute to him in connection with HCMP’s dissolution the cash

value of his HCMP interest as ascertained using the marina’s

July 31, 1998, appraised value of $16.5 million.   That approach

was consistent with the partnership agreement’s “buyout

provisions”, discussed infra, but inconsistent with the

applicable provisions of paragraph 12 of the partnership

agreement.   Collins also knew at or about that time that Sunroad

Asset intended to distribute the marina to itself or to its

affiliate.   That approach also was inconsistent with the

applicable provisions of paragraph 12 of the partnership

agreement.
                              - 10 -

     On October 7, 1998, Collins commenced the lawsuit in the

Superior Court of California, San Diego County (trial court),

under the caption “Collins v. Feldman, et al., Case No. 724762".5

Collins initially advanced in the lawsuit five causes of action.

The first cause of action alleged that the Sunroad defendants had

to provide Collins with an accounting.   The second cause of

action alleged that the Sunroad defendants breached a fiduciary

duty owed to Collins.   The third cause of action alleged that

Collins was entitled to a recision of a resolution passed by the

Port District approving an assignment of the marina lease from

HCMP to Sunroad limited partnership.   The fourth cause of action

alleged that Collins was entitled to declaratory relief in the

form of a declaration that HCMP’s managing general partner must

under the partnership agreement sell the marina in the public

market to the highest bidder and may not under the partnership

agreement distribute the marina to itself or to an entity under

its control.   The fifth cause of action alleged that Collins was

entitled to a cancellation of the assignment of HCMP’s

partnership interest in the marina.


     5
       “Feldman” is Aaron Feldman (Feldman), the president of
Sunroad corporation, Sunroad Real Estate, and Sunroad Asset. The
other defendants in the lawsuit were Sunroad Asset, formerly
known as Sunroad corporation, Marina Holdings, the Port District,
and a California limited partnership named Sunroad Marina
Partners, L.P. (Sunroad limited partnership). (We refer to all
five defendants collectively as the defendants. We refer
collectively to the defendants other than the Port District as
the Sunroad Defendants.)
                               - 11 -

     Collins alleged in the lawsuit that the “buyout provisions”

of the partnership agreement, which allowed for a liquidation of

a partner’s interest on the basis of the appraised values of

HCMP’s assets, were not applicable but that the applicable

provisions were those in paragraph 12 of the partnership

agreement.   Collins also alleged that Sunroad Asset was not

allowed by the partnership agreement to distribute the marina to

itself or to an entity under its control but had to sell the

marina in the public market and divide the net proceeds among the

partners in accordance with their applicable percentages as set

forth in the partnership agreement.

     On November 18, 1998, Sunroad Asset, in its capacity as a

general partner of HCMP and Sunroad limited partnership, formally

assigned the rights, title, and interest in the marina lease from

HCMP to Sunroad limited partnership.    The document underlying

this assignment was not executed by either Collins or the Port

District.    Approximately 3 weeks later, on December 8, 1998,

Sunroad Asset sent to Collins a check for $389,662; i.e., the

amount that Sunroad Asset maintained was the value of Collins’s

interest in HCMP as ascertained using the aforementioned

appraised value of the marina.    Collins did not cash this check

upon receipt but deposited it with the trial court pending

resolution of the lawsuit.
                               - 12 -

     On April 15, 1999, HCMP filed its 1998 partnership return

for the period from January 1 to December 7, 1998.      In addition

to reporting that it was a “final” return, the return reported

that as of the end of December 7, 1998, (1) HCMP had terminated

and had no assets or liabilities, (2) HCMP had liquidated

Collins’s interest in it through a cash distribution of $389,662,

(3) each HCMP partner’s share of partnership liabilities was

zero, and (4) each HCMP partner’s capital account had a zero

balance.   HCMP’s partners as of December 7, 1998, were Collins,

Marina Holdings, and Sunroad general partnership.6     HCMP reported

on its 1998 partnership return that these partners had received

the following distributions during 1998:

                      Money    Other than Money       Total

  Sunroad general
    partnership      $63,996    ($4,312,809)      ($4,248,813)
  Marina Holdings     18,415        466,023           484,438
  Collins            389,662                          389,662

     Marina Holdings and Sunroad general partnership each filed a

“final” 1998 partnership return for the period from January 1, to

December 7, 1998.   Marina Holdings reported on its 1998

partnership return that as of December 7, 1998, its general

partner was Sunroad Asset, and its limited partners were Sunroad




     6
       Sunroad general partnership began business on Oct. 1,
1998. The record does not reflect the details on the transfer of
the HCMP interest from Sunroad Asset to Sunroad general
partnership.
                               - 13 -

Asset and Walter Turner IRA.   The return reported that these

partners had received the following distributions during 1998:

                             Money   Other than Money      Total

  Sunroad Asset
    as a general partner   $14,906        $348,451        $363,357
    as a limited partner     3,077          71,923          75,000
  Walter Turner IRA          1,231          28,769          30,000

Sunroad general partnership reported on its 1998 partnership

return that as of December 7, 1998, its partners were Sunroad

Asset and Walter and Marian Turner Family Trust.       The return

reported that these partners had received the following

distributions during 1998:

                             Money   Other than Money       Total

  Sunroad Asset            $62,799      ($4,886,102)    ($4,823,303)
  Walter Turner IRA            417          (32,417)        (32,000)

     In or about July 1999, Sunroad limited partnership and MONY

executed an Allonge to the $13.5 million promissory note.       The

Allonge provided that Sunroad limited partnership had assumed

HCMP’s obligations under the MONY Loan.     The Allonge also

provided that Sunroad Asset and Marina Holdings were not released

from any obligation under the $13.5 million promissory note by

virtue of their status as general partners of HCMP before its

dissolution and that such was so notwithstanding HCMP’s

dissolution and the present assumption.     Sunroad limited

partnership reported on its 1998 partnership return that its

general partner was Sunroad Asset and that its limited partners
                              - 14 -

were Sunroad Asset, Walter and Marian Turner Family Trust, and

Walter Turner IRA.   That return reported that it covered the

taxable year of Sunroad limited partnership starting with its

commencement of business on November 17, 1998, and ended on

September 30, 1999, the last day of its fiscal year.   That return

reported the income and expense of the marina as the income and

expense of Sunroad limited partnership.

     Collins and his wife filed their 1998 individual income tax

return jointly.   They included with that return a Form 8082 with

respect to four items reported on HCMP’s 1998 partnership return.

Collins reported on the Form 8082 that he was reporting these

items inconsistently with HCMP’s treatment of them.    First, HCMP

reported on its 1998 partnership return and on Collins’s 1998

Schedule K-1, Partner’s Share of Income, Credits, Deductions,

etc., that the partnership return was a “Final return” and that

the Schedule K-1 was a “Final K-1".    Collins reported on the Form

8082 that his 1998 Schedule K-1 was not final in that his HCMP

interest was “involuntarily terminated” and he remained a partner

until the final outcome of the lawsuit.   Second, HCMP reported on

its 1998 partnership return that it had no debt as of the end of

the reported period, and it reported on Collins’s accompanying

1998 Schedule K-1 that Collins’s share of HCMP’s qualified

nonrecourse financing at that time was zero.   Collins reported on

the Form 8082 that his share of HCMP’s qualified nonrecourse
                              - 15 -

financing was $1,350,000 as of December 31, 1998.    Third, HCMP

reported on Collins’s 1998 Schedule K-1 as to an analysis of his

capital account that his share of net income per books, other

increases, and other decreases totaled $1,017,332.    Collins

reported on the Form 8082 that these items totaled $3,449 because

“THE AMOUNT REPORTED ON THE K-1 IS DUE TO AN INVOLUNTARY

TERMINATION OF THE PARTNER’S INTEREST.   THE TAXPAYERS WILL NOT BE

REPORTING ANY GAIN AMOUNT, IF APPLICABLE, UNTIL THE FINAL OUTCOME

OF THIS CASE.”   Fourth, HCMP reported on Collins’s 1998 Schedule

K-1 that his withdrawals and distributions for that year totaled

$389,662, or more specifically, the amount listed on that return

as a cash distribution made to him during that year.    Collins

reported on the Form 8082 that he had not received any

distribution or withdrawal during 1998 in that the “CHECK

RECEIVED BY TAXPAYER WAS TRANSFERRED TO THE CLERK OF THE SUPERIOR

COURT OF SAN DIEGO PENDING FINAL SETTLEMENT OF THE CASE”.

     Collins’s fourth cause of action in the lawsuit sought

declaratory relief.   Collins moved the trial court for summary

judgment as to this issue, as did the Sunroad defendants.     The

trial court on August 11, 1999, issued an order granting

Collins’s motion and denying the motion of the Sunroad

defendants.   Previously, the trial court had ruled that Sunroad

Asset had dissolved HCMP as of May 26, 1998, and that Sunroad

Asset’s distribution of HCMP’s assets was improper in that the
                               - 16 -

applicable provisions of the partnership agreement required a

public sale of those assets.   The trial court’s August 11, 1999,

order stated that Sunroad Asset must sell the marina “on the open

market at the highest price * * * [it] can procure after a

reasonable marketing effort” and that it is “not legally entitled

to distribute Sunroad Marina [the marina] * * * in kind to itself

and/or an entity or entities it controls while distributing cash

to Collins”.

     Following this order, Sunroad Asset declined to put the

marina on the market.   On October 7, 1999, Collins amended his

complaint in the lawsuit to add a sixth cause of action for

specific performance.   This cause of action prayed that the trial

court compel Sunroad Asset to sell the marina in the open market

and to distribute the sale proceeds pro rata to the partners in

compliance with paragraph 12 of the partnership agreement and the

trial court’s August 11, 1999, order.

     The lawsuit was tried on April 4, 5, 6, and 26, 2000, and

the trial court filed its Statement of Decision and entered its

related judgment on October 17, 2000.   The judgment stated in

relevant part that:

          IT IS ORDERED, ADJUDGED AND DECREED THAT:

          1. Pursuant to the Court’s August 11, 1999, Order
     on Plaintiff’s Fourth Cause of Action for Declaratory
     Relief, plaintiff is entitled to and has a judicial
     declaration that Harbor Cove Marina Partners dissolved
     as of May 26, 1998, and that the applicable Partnership
                              - 17 -

     Agreement required a public sale of the partnership
     assets upon dissolution;

          2. Notwithstanding the foregoing, plaintiff shall
     have and recover nothing against defendants, or any of
     them, except the plaintiff may withdraw the sum of
     $389,662 deposited with the Court, plus interest
     accrued thereon;

           3. Defendants [sic] Sunroad Asset Management,
     Inc. shall have and receive from plaintiff the sum of
     $388,514.93 * * *; said sum represents the reasonable
     attorneys’ fees and costs of Sunroad Marina, Inc. and
     its predecessors [sic] Sunroad Asset Management, Inc.
     in defending against plaintiff’s First, Second, Fifth
     and Sixth Causes of Action, and which sum is net of
     plaintiff’s reasonable attorneys’ fees and costs with
     respect to the Fourth Cause of Action to August 11,
     1999;

The judgment reflected the trial court’s holding against Collins

as to each of his six causes of action but for the fourth.

     The trial court’s accompanying “STATEMENT OF DECISION”,

which was amended on November 9, 2000, to correct a minor

typographical error, reflected the trial court’s finding that

HCMP was dissolved on May 26, 1998, and that HCMP was terminated,

was wound up, and had its assets distributed as of December 8,

1998.   The trial court also found that the payment of $389,662 to

Collins for his interest in HCMP was not less than the fair

market value of that interest and ordered that Collins could

withdraw from the trial court the $389,662 (with interest

thereon) as full compensation for his interest in HCMP.    Collins

shortly thereafter withdrew the $389,662 from the trial court.
                              - 18 -

     Collins appealed to the court of appeal the portion of the

trial court’s judgment that denied him specific performance of

the provision in the partnership agreement that required the

liquidation and sale of HCMP’s assets upon its dissolution.     The

Sunroad defendants cross-appealed from the portion of the trial

court’s order granting Collins summary adjudication on the fourth

cause of action that decreed that Sunroad Asset must sell HCMP’s

assets “on the open market” and may not distribute them in kind.

     On March 25, 2002, respondent mailed the FPAA to “Tax

Matters Partner, Harbor Cove Marina Partners” and mailed a copy

of the FPAA to Sunroad Asset in its capacity as HCMP’s tax

matters partner.   Respondent determined in the FPAA that HCMP’s

partnership return was correct as filed.   The FPAA states that

the bases for this determination were twofold.   First, the FPAA

states, HCMP filed a “final” partnership return for that year.

Second, the FPAA states, the trial court concluded in its October

17, 2000, decision that HCMP “dissolved” as of May 26, 1998.

     On March 29, 2002, 3 days after the FPAA was issued, the

court of appeal affirmed the holding for Collins on the fourth

cause of action and reversed the trial court’s holding against

Collins on the sixth cause of action concerning specific

performance.   The court of appeal directed the trial court to

grant to Collins specific performance of that provision of the

partnership agreement and awarded to him his costs of appeal.
                              - 19 -

The court of appeal noted that the trial court’s denial of

Collins’s request for specific performance allowed Sunroad Asset

to do expressly what the partnership agreement and the trial

court had stated that it could not do; i.e., operate under the

buyout provisions of the partnership agreement rather than the

applicable liquidation provisions.

     On April 26, 2002, respondent mailed another copy of the

FPAA to Collins in his capacity as a notice partner of HCMP.

When the tax matters partner of HCMP did not timely petition this

Court to readjust partnership items, see sec. 6226(a), Collins,

as an HCMP notice partner, filed his petition with the Court on

August 15, 2002.   Collins’s petition to this Court is timely

under section 6226(b)(1).

     On January 15, 2003, upon remand of the lawsuit from the

court of appeal, the trial court entered a minute order that

directed specific performance of the partnership agreement as

requested by Collins.   The minute order also noted that HCMP had

not been wound up as initially determined by the trial court and

that Collins, as a partner in HCMP, was entitled to his share of

leasehold profits from November 18, 1998, through the date on

which the marina was sold in the open market.   The minute order

directed the Sunroad defendants to “account for and restore to

Plaintiff his share of the profits as defined by the HCMP

partnership agreement generated from and after November 18, 1998,
                             - 20 -

by operation of the Sunroad Marina leasehold, held by any of the

Sunroad Marina Defendants through and including the present and

continuing through the sale of the subject leasehold.”

     On February 14, 2003, the trial court entered a second

amended judgment in the lawsuit.   The second amended judgment

stated in relevant part:

          IT IS ORDERED, ADJUDGED AND DECREED THAT:

          1. Pursuant to the court’s August 11, 1999, Order
     on Plaintiff’s Fourth Cause of Action for Declaratory
     Relief, plaintiff is entitled to and has a judicial
     declaration that HCMP dissolved as of May 26, 1998, and
     that the applicable provisions of the HCMP partnership
     agreement required a public sale of the partnership
     assets upon dissolution;

          2. Pursuant to the aforementioned Court of Appeal
     decision, plaintiff is granted specific performance as
     prayed in his Sixth Cause of Action. SMP [Sunroad
     limited partnership], as constructive trustee of HCMP,
     shall (i) sell HCMP’s assets including, without
     limitation, the lessee’s rights to the property
     commonly known as Sunroad Resort Marina, on the open
     market at the highest price SMP can procure after a
     reasonable marketing effort and (ii) divide the net
     sales proceeds among the parties as follows:

        Plaintiff Robert A. Collins...............12%

        Defendant Marina Holding [sic] Partners...24%

        Defendant Sunroad Asset Management, Inc.
        fka Sunroad Marina, Inc...................64%

          3. Plaintiff is the sole prevailing party. He
     shall have and recover from the Sunroad Defendants
     reasonable trial attorney’s fees in the sum of
     $168,829.50 and trial costs of suit in the sum of
     $4,841.70, for a total of $173,671.20.
                        - 21 -

     4. Plaintiff shall have and recover from the
Sunroad Defendants costs and reasonable attorney’s fees
on appeal in the sum of $27,321.31.

     5. Except to the extent inconsistent with the
Court of Appeal’s reversal of judgment in favor of the
Sunroad Defendants on plaintiff’s Sixth Cause of Action
* * *, plaintiff shall take nothing by his First,
Second and Fifth Causes of Action. The previous award
of trial attorney’s fees and costs to defendant Sunroad
Asset Management, Inc. is vacated.

     6. Plaintiff shall take nothing by his Third
Cause of Action against defendant San Diego Unified
Port District (“the Port”). The Port shall have and
receive from plaintiff its costs as shown on an
approved memorandum of costs, the amount of which shall
hereafter be entered in this blank: $       .

     7. Pursuant to this court’s Minute Order dated
August 4, 2000, plaintiff’s Notice of Pendency of
Action dated and recorded January 13, 1999, in the
office of the San Diego County Recorder as Instrument
No. 1999-020302, has been and is expunged.

     8. Plaintiff’s rights as a general partner of
HCMP remain intact. Accordingly, SMP shall forthwith
provide to plaintiff an accounting of all its income
and expenses on account of operation and refinancing of
the Sunroad Resort Marina Leasehold from and after
November 18, 1998, to date; and shall restore to
plaintiff (a) 12% of net sums realized by any of the
Sunroad Defendants from any and all loans repayment of
which was secured in whole or in part by a lien upon
the Sunroad Marina Leasehold, (b) 10% of all net
operating income or other cash distributions made to
any of the Sunroad Defendants on account of operations
of the Sunroad Marina Leasehold from and after November
18, 1998, until sale of the Leasehold directed in
Paragraph 2, above, and (c) 10% of all cash, cash
equivalents or assets purchased from cash generated by
operation of the Sunroad Marina Leasehold from and
after November 18, 1998, held by any of the Sunroad
Defendants.

     9. The Court retains jurisdiction to monitor
compliance by the Sunroad Defendants with Paragraph 2
of this Second Amended Judgment.
                              - 22 -

          10. This Second Amended Judgment supersedes and
     replaces the Amended Judgment entered herein on August
     14, 2002.

Approximately 2 months later, on April 18, 2003, the trial court

filed a document confirming a sale of the marina at auction to

Sunroad limited partnership at the highest bid of $25.5 million.

Bidders at the auction numbered three, and Sunroad limited

partnership’s high bid was the 14th bid after Sunroad limited

partnership had made an opening bid of $16.5 million.

     Following this sale, Sunroad limited partnership declined to

transfer part of the sale proceeds to Collins as directed by the

court of appeal decree granting specific performance and the

trial court’s order of February 14, 2003.   Collins moved the

trial court to compel compliance with the specific performance

decree.   On August 29, 2003, by way of a 2-page order, the trial

court denied that motion.   The order noted that Collins had

withdrawn the $389,662 from the trial court and that it had

stated in its initial decision, as amended, that this amount

equaled the amount that Collins would have received had it

granted his request for specific performance.   The order

concluded that California law (specifically, Preluzsky v. Pac.

Co-operative Cafeteria Co., 232 P. 970 (Cal. 1925), which held

that a voluntary acceptance of the benefit of a judgment or order

is a bar to the prosecution of an appeal therefrom), estopped

Collins from prosecuting his appeal of the portion of the
                                - 23 -

judgment that was ultimately reversed by the court of appeal in

that, the trial court concluded, the court of appeal could not

overturn that portion of the judgment without affecting Collins’s

right to the $389,662.    By virtue of this estoppel, the order

stated, the court of appeal decision and all orders post appeal

were without any legal basis, and the judgment entered by the

trial court on October 17, 2000, was the final judgment in the

lawsuit.   Collins filed a notice of appeal as to this order on

September 8, 2003.    That appeal is currently before the court of

appeal pending its decision.

                              Discussion

     This case is a TEFRA partnership proceeding that was brought

by a notice partner.     Respondent issued an FPAA to the notice

partner, Collins, that determined no changes to HCMP’s 1998

partnership return.    Collins timely petitioned this Court to

readjust HCMP’s partnership items relating to the FPAA.     Given

the issuance of the FPAA, which we find to be valid, and

Collins’s timely petition for readjustment of HCMP’s partnership

items related thereto, we conclude that we have jurisdiction to

redetermine all partnership items of HCMP for 1998 and to

allocate properly those items among HCMP’s partners.     Sec.

6226(f); Seneca, Ltd. v. Commissioner, 92 T.C. 363, 365 (1989),

affd. without published opinion 899 F.2d 1225 (9th Cir. 1990);

Transpac Drilling Venture 1982-22 v. Commissioner, 87 T.C. 874
                                - 24 -

(1986).   This is so even though the FPAA contained no changes

made by respondent.   See Univ. Heights at Hamilton Corp. v.

Commissioner, 97 T.C. 278, 282 (1991).

     Congress promulgated the TEFRA partnership unified audit and

litigation provisions of sections 6221 through 6234 intending to

simplify and streamline the audit, litigation, and assessment

procedures with respect to partnerships and their partners.

These provisions centralized the tax treatment of partnership

items and resulted in equal treatment for partners through the

uniform adjustment of each partner’s tax liability in a single,

unified proceeding.   Chimblo v. Commissioner, 177 F.3d 119,

120-121 (2d Cir. 1999), affg. T.C. Memo. 1997-535; Kaplan v.

United States, 133 F.3d 469, 471 (7th Cir. 1998).    Because the

income of a partnership is not subject to Federal income tax at

the partnership level, but is passed through and taxed to the

partners, multiple proceedings were required before TEFRA to

address the tax treatment of partnership items.     Chimblo v.

Commissioner, supra at 121.     Congress in enacting TEFRA intended

that “the tax treatment of items of partnership income, loss,

deductions, and credits will be determined at the partnership

level in a unified partnership proceeding rather than separate

proceedings with the partners.”    H. Conf. Rept. 97-760, at 600

(1982), 1982-2 C.B. 600, 662.
                               - 25 -

     TEFRA requires that respondent notify partners of the

beginning and end of partnership-level administrative

proceedings.   Sec. 6223(a).   If and when an FPAA is issued as to

those proceedings, the “tax matters partner”, generally a person

or entity designated as such by the partnership under applicable

regulations or, more commonly, the general partner in control of

the partnership, sec. 6231(a)(7); Chimblo v. Commissioner, supra

at 121, may contest the FPAA within 90 days of its issuance by

filing a petition for readjustment of “partnership items” in this

Court, the Court of Federal Claims, or the appropriate Federal

District Court.    Sec. 6226(a).   If the tax matters partner does

not file such a petition by the close of that 90-day period, then

any notice partner or 5-percent group may file a petition within

the next 60 days.    Sec. 6226(b)(1).   Once an action for

readjustment of partnership items is commenced by either the tax

matters partner or a notice partner, any partner with an interest

in the outcome of that action may participate in it.     Sec.

6226(c) and (d).

     In the context of TEFRA, a “partnership item” is any item

that must be taken into account for the partnership’s taxable

year to the extent that regulations prescribe it as an item that

is more appropriately determined at the partnership level.      Sec.

6231(a)(3); Maxwell v. Commissioner, 87 T.C. 783, 789 (1986).

Section 301.6231(a)(3)-1, Proced. & Admin. Regs., sets forth a
                                - 26 -

list of items which the Treasury Department has concluded are

partnership items.    That list includes the “partnership aggregate

and each partner’s share of * * * (i) Items of income, gain,

loss, deduction, or credit of the partnership; * * * [and]

(v) Partnership liabilities (including determinations with

respect to the amount of the liabilities * * * and changes from

the preceding taxable year)”.    Sec. 301.6231(a)(3)-1(a)(1),

Proced. & Admin. Regs.    That list also includes items relating to

distributions from the partnership to the extent that a

determination of those items can be made from conclusions that

the partnership is required to make with respect to an amount,

the character of an amount, or the percentage interest of a

partner in the partnership, for purposes of the partnership books

and records or for purposes of furnishing information to a

partner.   Sec. 301.6231(a)(3)-1(a)(4), Proced. & Admin. Regs.

The regulations state further that a partnership item not only

includes those items expressly listed in the regulations, but

also includes “the legal and factual determinations [e.g., the

partnership’s taxable year] that underlie the determination of

the amount, timing, and characterization of items of income,

credit, gain, loss, deduction, etc.”     Sec. 301.6231(a)(3)-1(b),

Proced. & Admin. Regs.

     Collins disputes in the Form 8082 the four items discussed

supra pp. 14-15.     Each of these items is an HCMP partnership item
                              - 27 -

in that it relates to information underlying the determination of

each HCMP partner’s share of liabilities and distributions.

     The linchpin of the four items is the parties’ dispute as to

whether HCMP terminated in 1998 for Federal tax purposes.

Section 708(a) provides that a partnership continues to exist

until terminated.   Section 708(b) provides that a termination

requires the happening of one of two events.   First, under

section 708(b)(1)(A), a partnership terminates when “no part of

any business, financial operation, or venture of the partnership

continues to be carried on by any of its partners in a

partnership”.   Second, under section 708(b)(1)(B), a partnership

terminates when “within a 12-month period there is a sale or

exchange of 50 percent or more of the total interest in

partnership capital and profits.”

     The parties focus on the first of these events.   So do we.7

While the dissolution of a partnership is governed by State law,

the termination of a partnership for Federal tax purposes is

controlled by Federal law.   A termination of a partnership for

Federal tax purposes may be different from its termination,


     7
       As to the second event, the liquidation of a partnership
interest, as reportedly occurred here, is not a “sale or
exchange” for purposes of sec. 708(b)(1)(B). Sec. 1.708-1(b)(2),
Income Tax Regs. (Sec. 1.708-1, Income Tax Regs., was amended on
Jan. 3, 2001. T.D. 8925, 2001-1 C.B. 496, 505. That amendment,
in relevant part, removed old par. (b)(2) and redesignated old
par. (b)(1). Id., 2001-1 C.B. at 500. This part of the
amendment applies to this case in that it is effective Jan. 4,
2001. Id., 2001-1 C.B. at 496.)
                              - 28 -

dissolution, or winding-up under State law, and a partnership may

continue to exist for Federal tax purposes even though State law

provides that the partnership has terminated, dissolved, or

wound-up.   Fuchs v. Commissioner, 80 T.C. 506, 509-510 (1983);

Neubecker v. Commissioner, 65 T.C. 577, 581-582 (1975); see also

Maxcy v. Commissioner, 59 T.C. 716 (1973).     When a partnership

terminates under Federal law, its taxable year closes on the same

date.   Sec. 1.708-1(b)(3), Income Tax Regs.

     For purposes of Federal tax law or, more specifically,

section 708(b)(1)(A), the date of termination is the date on

which the partnership winds up its affairs in cessation of its

business operation.   Sec. 1.708-1(b)(3)(i), Income Tax Regs.

Whether a partnership has done so is a factual determination that

generally rests on an analysis of the various subsidiary elements

of proof.   The regulations interpreting section 708(b)(1)(A)

establish a liberal approach to a finding of a business nexus

sufficient not to terminate a partnership.     In accordance with

those regulations, a partnership continues to exist even when its

operations are substantially changed or reduced in a period of

winding up, and even when its sole asset during that period is

cash.   Sec. 1.708-1(b)(1), (3)(i), Income Tax Regs.    A

termination under section 708(b)(1)(A) occurs only when “the

operations of the partnership are discontinued and no part of any

business, financial operation, or venture of the partnership
                              - 29 -

continues to be carried on by any of its partners in a

partnership.”   Sec. 1.708-1(b)(1)(3)(i), Income Tax Regs.    In

other words, the regulations indicate, a partnership is

terminated under section 708(b)(1)(A) only when the winding up of

its business affairs is completed and “all remaining assets,

consisting only of cash, are distributed to the partners”.        Id.

     The decided cases apply the statute similarly.     Those cases

indicate that a nominal amount of continuing business or

financial activity precludes a partnership from terminating for

Federal tax purposes even when the partnership has abandoned or

discontinued its primary business activity.   In Foxman v.

Commissioner, 41 T.C. 535 (1964), affd. 352 F.2d 466 (3d Cir.

1965), for example, a partnership sold its assets to a

corporation in which the partners were shareholders and received

in exchange two promissory notes.   The Court held that the

partnership continued to exist after its asset sale in that it

held the notes received in the sale, collected interest on those

notes, and made minor purchases.    Id. at 556-557.    In Baker

Commodities, Inc. v. Commissioner, 415 F.2d 519 (9th Cir. 1969),

affg. 48 T.C. 374 (1967), the Court of Appeals for the Ninth

Circuit reached a similar result.   There, the partnership’s

principal asset was a convalescent hospital that was closed and

then sold 9 months later in exchange for a note.      The court cited

Foxman and held that the partnership’s sale of its asset did not
                                - 30 -

result in its termination.     Id. at 526.   Respondent argued in

Baker Commodities, Inc. that the partnership had terminated upon

its sale of the hospital because it then ceased engaging in its

principal business activity.    The court disagreed.   The court

held that the cessation of a partnership’s primary purpose is not

necessarily a termination under section 708 but what is required

by the statute is a complete cessation of all partnership

activity, inclusive of a distribution to the partners of all of

the partnership’s assets.    Id.; accord Neubecker v. Commissioner,

supra at 582-583 (complete cessation of the partnership business

is required to effect a termination of the partnership under

section 708(b)(1)(A)).    The court noted that a partnership whose

sole operation is the winding up of its affairs terminates only

upon the cessation of all activity and the distribution of its

remaining asset, cash.    Baker Commodities, Inc. v. Commissioner,

supra at 526-527.

     In Baker Commodities, Inc. v. Commissioner, supra at 526,

the court also relied upon Ginsburg v. United States, 184 Ct. Cl.

444, 396 F.2d 983 (1968).    There, the partnership discontinued

its primary business activity, the development of land, but

continued to cultivate the land.    The Court of Claims declined to

find that the partnership had terminated through a cessation of

its primary business.    The Court of Claims rejected the
                             - 31 -

Government’s argument that a partnership terminates upon the

abandonment of its primary purpose, stating:

          Subparagraph (A) of Section 708(b)(1) provides
     that a partnership is terminated if ‘no part of any
     business, financial operation, or venture of the
     partnership continues to be carried on by any of its
     partners in a partnership’ (emphasis added). There is
     nothing to indicate that this provision requires less
     than what it says--a complete cessation of all
     partnership business--and therefore we cannot accept
     the Government’s contention that a partnership is
     terminated if it abandons just its ‘primary purpose.’
     See David A. Foxman, 41 T.C. 535, 557 (1964), aff’d,
     352 F.2d 466 (C.A. 3, 1965) (no termination even though
     ‘these items were of comparatively minor character in
     contrast to the enterprise previously carried on’);
     James v. United States, 63-1 U.S.T.C. 9478, at 88307,
     88309 (M.D. Ga. 1963); cf. Treas. Reg. § 1.708-1(b)(1).
     [Id. at 988.]

The Court of Claims also stated that “the fact that the

partnership continued to hold the property for a business

purpose--investment–-might well be an adequate showing that it

was not sufficiently inoperative to evoke the termination

provision of Section 708(b)(1)(A).”   Id.; accord Yagoda v.

Commissioner, 39 T.C. 170, 182-183 (1962) (partnership that

ceased its business and existence in 1945 was not terminated for

Federal income tax purposes until 1947, when it finished winding

up its affairs), affd. 331 F.2d 485 (2d Cir. 1964); Hoagland v.

Commissioner, T.C. Memo. 1971-310 (partnership did not terminate

as a result of cessation of business where the land development

business for which it was originally formed was frustrated and
                              - 32 -

the partnership’s only function was holding land pending its

sale).

     Turning to the facts at hand, we are unaware of any decided

case that directly answers the question at hand; to wit, whether

a partnership terminates for Federal tax purposes when (1) its

controlling partner purportedly winds up the affairs of the

partnership’s business operation by using procedures apparently

contrary to those stated in the partnership agreement,

(2) another partner has filed a lawsuit to compel the use of the

procedures stated in the agreement, and (3) a resolution of that

lawsuit could reasonably lead to the partnership’s reporting in a

subsequent year of significant income, credit, gain, loss, or

deduction.   With our understanding of the statute, regulations,

and judicial jurisprudence in mind, however, it is evident to us

that we must answer this question in the negative and hold that

HCMP was not terminated during 1998.   HCMP’s affairs as to its

business operations were not completed as of the end of that year

in that an HCMP partner, Collins, was at that time legitimately

challenging the procedures used by the managing general partner

in winding up the partnership’s business, and a resolution of

Collins’s lawsuit could reasonably lead to HCMP’s reporting in a

subsequent year of significant income, credit, gain, loss, or
                              - 33 -

deduction (e.g., from a public sale of the marina).8   While

HCMP’s managing general partner may have subjectively intended to

terminate HCMP for Federal tax purposes during 1998, the fact of

the matter is that it failed to wind up HCMP’s business operation

in accordance with the procedures which the HCMP partners as a

whole had agreed would be applied in such a situation.   The

agreed-upon procedures of paragraph 12 state clearly and

unequivocally that the managing general partner of HCMP shall in

the case of HCMP’s dissolution wind up and liquidate the

partnership by “selling the Partnership property”.

     For Federal tax purposes, Congress has given the partners of

a partnership broad authority to negotiate the terms of their

business relationship, including the terms governing their

business’s formation, operation, and dissolution, so as to

achieve simplicity, flexibility, and equity as between the

partners.   See Foxman v. Commissioner, 41 T.C. at 549-552 (and

the legislative history cited therein); see also Moore v.

Commissioner, 70 T.C. 1024, 1033 (1978); Kresser v. Commissioner,


     8
       We also do not believe that Collins’s HCMP partnership
interest was effectively liquidated as of the end of 1998 in that
(1) he had filed the lawsuit challenging as inconsistent with the
partnership agreement his right to keep the $389,662 check sent
to him as a liquidation distribution and (2) he had delivered
that check to the trial court pending resolution of the lawsuit.
Cf. Bones v. Commissioner, 4 T.C. 415, 420 (1944) (taxpayer’s
refusal to cash a check did not result in constructive receipt of
the income where cashing the check would impair the taxpayer’s
legal position by creating a situation that might be construed as
an accord and satisfaction concerning a disputed claim).
                               - 34 -

54 T.C. 1621, 1630-1631 (1970).    Given this broad grant of

authority, the legislative intent for simplicity, flexibility,

and equity as between the partners, and the fact that each

partner’s distributive share of income, gain, loss, deduction, or

credit generally turns on the partnership agreement, sec. 704(a),

it seems to us that the winding up of HCMP (and hence its

termination) for Federal tax purposes must also be in accordance

with the partnership agreement.    In fact, but for a procedural

violation that the trial court stated was committed by Collins as

to the lawsuit, and which the trial court believed made void all

judicial action taken in the lawsuit after October 17, 2000, even

the trial court has concluded that HCMP continues to exist for

State law purposes.   The trial court concluded in 2003 that HCMP

was not then wound up, that Collins remained an HCMP partner, and

that Collins, as a partner, was entitled to his share of HCMP

income from November 18, 1998, through the time that the marina

was publicly sold.    As the Treasury regulations on the

termination of partnerships are careful to note, a partnership’s

termination under section 708(b)(1)(A) does not occur until the

winding up of its business operations is completed.

     Respondent seeks a contrary holding focusing on the fact

that HCMP and its partners other than Collins filed tax returns

reporting that HCMP had been terminated during 1998 and that

Sunroad limited partnership filed a tax return for a period
                                - 35 -

thereafter reporting that it had acquired HCMP’s business,

assets, and liabilities.   According to respondent, Collins may

not unilaterally disavow his other partners’ view that HCMP had

terminated during 1998, nor the fact that HCMP’s business

operation is now being reported by another taxpayer.   We find

respondent’s focus misplaced.    Simply because a managing partner

acts unilaterally to dissolve a partnership, to zero out the

partnership assets and liabilities, and to report to the

Commissioner that the partnership has been terminated does not

mean that the partnership has terminated for Federal tax

purposes.   Nor is it critical to our decision that HCMP is no

longer reporting the marina business as its own.   What is

important to us is that the parties to the HCMP partnership

agreement had agreed that the marina would be sold by HCMP in the

case of a dissolution, that basic tax principles establish that

any income or loss on such a sale must be reported by HCMP, and

that such a sale by or on behalf of HCMP may reasonably occur in

a year after 1998.
                                - 36 -

     We hold that HCMP was not terminated during 1998 as reported

by its managing general partner and as determined by respondent.

All arguments for a contrary holding have been considered, and

those arguments not discussed herein have been found to be

without merit.   Accordingly,


                                          Decision will be entered

                                     under Rule 155.
