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- ® Wolters Kluwer
 xi

Conten ts in Detail

Paragraph
P ART I - B ASIC P ARTNERSHIP O PERATIONS
Chapter 1 -What Is a Partnership ?
Introduction ........................................... . . . 101
Classification of Partnerships . ... . . ... . . . . ... . .. . ... . . . . ... . . . 102
Advantages and Disadvantages of Operating as a Partnership . . ... . . . 103
Tax Issues Involving Classification of LLCs as Partnerships ....... . . . 104
IRS Reclassification .......... . .......................... . . . 105
Distinguishing Partnerships fro1n Other Relationships ... . . . . ... . . . 106
Tenancy in Common Distinguished .... . ..... . ...... . . . 106.01
Election to Be Excluded from Subchapter K ... . ...... . . . 106.02
Shared Expenses Distinguished . . ... . .. . ... . . . . ... . . . 106.03
E1nployment Relationships Distinguished . . ... . . . . ... . . . 106.04
Creditor-Debtor Relationships Distinguished .. . ...... . . . 106.05
Lessor-Lessee Relationships Distinguished ............. . 106.06
Chapter 2 - Partnership Formation and Computation of P artner Basis
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
General Rule: Contribution of Property ls Treated as a Tax-Free
Exchange of Property for a Partnership Interest . . .. . ... . . . . ... . . . 202
Basis of Partner's Partnership Interest and Partnership's
Property ........................................ . 202.01
Holding Period of a Partner's Partnership Interest and a
Partnership's Property ............................. . 202.02
Depreciation Methods .. . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 203
Contributions of Encumbered Property . . . . . ... . .. . ... . . . . ... . . . 204
Effect of Partnership Operations on Basis . ............ . ...... . . . 205
Income and Loss-Taxable and Tax-Exempt ... . ...... . . . 205.01
Contributions and Distributions . . . ... . .. . ... . . . . ... . . . 205.02
Contributions Requiring Special Consideration .. . .. . ... . . . . ... . . . 206
Property Subject to Depreciation Recapture ............ . 206.01
Accounts Receivable . . ...... . ..................... . 206.02
Third-Party Notes Being Reported on the Installinent Method
206.03
Third-Party Notes Not Being Reported on the Instalhnent
Method ........................................ . 206.04
Partner's Perso nal Obligations . . ..... . . ..... . ...... . . . 206.05
Personal-Use Property . . . ... . . . . ... . .. . ... . . . . ... . . . 206.06
Investment Partnerships . ... . . . . ... . .. . ... . . . . ... . . . 206.07
xii Contents in Detail

Paragraph
Suspended Losses ................................ . 206.08
Chapter 3 - Receipt of a Partnership Interest for Services
Introduction ... . .. . ... . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 301
Capital Interest Received . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 302
Results to Service Partner ... . . . .... . ...... . ...... . . . 302.01
Results to Partnership ...... . . . .... . ...... . ...... . . . 302.02
Profit Interest Received ............. . . . .... . ...... . ...... . . . 303
Proposed Regulations ... . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 304
Results to Service Partner ... . . . . ... . .. . ... . . . . ... . . . 304.01
Results to Partnership . . . ... . . . . ... . .. . ... . . . . ... . . . 304.02
Value of the Partnership Interest . . ... . .. . ... . . . . ... . . . 304.03
Chapter 4 - Calculation of P artnership Income
Introduction ... . .. . ... . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 401
Both Entity and Aggregate Rules Apply . . . . . ... . .. . ... . . . . ... . . . 402
Involuntary Conversions . ... . . . . ... . .. . ... . . . . ... . . . 402.01
Code Sec. 1244 Stock ....... . ............. . ...... . . . 402.02
Prepaid Expenses .............................. . . . 402.03
Calculation of the Amount of the Partnership's Taxable Income ... . . . 403
Payments to a Partner .. . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 404
Payments to Partners as Co1npensation for Services or
Property Not Required as a Condition of Partner Status . . . . 404.01
Guaranteed Payments ............................. . 404.02
Payments Not Governed by Code Sec. 707 (a) or (c) .... . . . 404.03
Summary: ls 1bis "Much Ado About Very Llttle"? ...... . . . 404.04
Taxable Year .. . .. . ... . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 405
General Rules . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 405.01
Majority Interest Required Taxable Year .. . ... . . . . ... . . . 405.02
Principal Partner Required Taxable Year ...... . ...... . . . 405.03
Year of Least Aggregate Deferral. ..... . ............ . . . 405.04
Changes in Required Taxable Years .................. . 405.05
Business Purpose Taxable Year-The Natural Business Year.
405.06
Adopting a Taxable Year Other Than a "Required Year" or
"Natural Business" Year-End . . . . . ... . .. . ... . . . . ... . . . 405.07
52-53-Week Taxable Year ......................... . . . 405.08
Accounting Method ..................................... . . . 406
Organization and Syndication Expenses- Code Sec. 709 ......... . . . 407
Organization Expenses ............................ . 407.01
Syndication Costs ... . ............................ . 407.02
Investigation, Acquisition, and Start-Up Expenses-Code Secs. 195 and
263 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
Investigation Expenses . . ... . . . . ... . .. . ... . . . . ... . . . 408.01
Pre-opening Start-Up Expenses . . . ... . .. . ... . . . . ... . . . 408.02
Unamortized Investigation and Start-Up Expenses . . ... . . . 408.03
 Contents in Detail xiii

Paragraph
Code Sec. 195 Procedure .... . . . .... . ...... . ...... . . . 408.04
Chapter 5 - Character and Presentation of Partnership Income
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501
Presentation of a Partnership's Taxable Income . . . . . . . . . . . . . . . . . . . 502
Separately Sta ted Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503
Rental Real Estate Activities . . . . . . . . . . . . . . . . . . . . . . . . . . 503.01
Rental Activities Other Than Real Estate . . . . . . . . . . . . . . . . 503.02
Compensation Paid to Service Partners . . . . . . . . . . . . . . . . . 503.03
Interest and Royalty Income . . . . . . . . . . . . . . . . . . . . . . . . . 503.04
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503.05
Capital Gains and Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503.06
Code Sec. 1231 Gains and Losses . . . . . . . . . . . . . . . . . . . . . 503.07
Portfolio (Investment) Income and Related Deductions Other
Than the Interest Deduction . . . . .... . . .... . . ...... . . . 503.08
Code Sec. 212- Expenses for the Production of Income . . . . 503.09
Code Sec. 179 Expense . .... . . . .... . ...... . ...... . . . 503.10
Charitable Contribution Deduction ... . .. . ... . . . . ... . . . 503.11
Self-Employinent Income .... . . . .... . ...... . ...... . . . 503.12
Deduction for Foreign T axes and Taxes of U.S. Possessions
Allowed Under Code Secs. 164(a) and 901 ..... . ...... . . . 503.13
Alternative Minimum Tax Infonnation . . .. . . . . . . . . . . . . . . 503.14
Code Sec. 611- 0 il and Gas Well Depletion ... . ...... . . . 503.15
Income Attributable to Domestic Production Activities .. . . . 503.16
Interest Deductions .. . . .... . . . .... . . ..... . ...... . . . 503.17
Recovery of Previously Deducted Amounts . ... . . . . .... . . 503.18
Cancelled Debt Income . .... . . . .... . ...... . ...... . . . 503.19
Code Sec. 172- Net Operating Deduction, and Code Sec.
1212-Capital Loss Carrybacks and Carryovers . . . . ... . . . 503.20
Deduction for Personal Exemptions .. . ...... . ...... . . . 503.21
Code Sec. 213-Medical Expenses . . . . .. . ... . . . . ... . . . 503.22
Code Sec. 215-Alimony . ... . . . . ... . .. . ... . . . . ... . . . 503.23
Code Sec. 217- Moving Expenses ........... . ...... . . . 503.24
Code Sec. 219-Retirement Savings ..... . ... . . . . ... . . . 503.25
T rust or Estate Partner . .... . . . ..... . ..... . ...... . . . 503.26
Fringe Benefits .. . . . . . . ... . . . . ... . .. . ... . . . . ... . . . 503.27
Code Sec. 212(3)-Tax Return Preparation Expenditures . . . 503.28
Special Allocations .... . .... . . . .... . ...... . ...... . . . 503.29
Schedules M· 1, M·2, and M·3 . . . . . . ... . . . . ... . .. . ... . . . . ... . . . 504
Schedules M· 1 and M-2 . .... . . . .... . ...... . ...... . . . 504.01
Schedule M-3 . . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 504.02
Reporting Taxable Inco1ne for Large Partnerships/U.Cs .. . ...... . . . 505
Eligibility .... . . ..... . .... . . . .... . ...... . ...... . . . 505.01
Making the Election . . . . ... . . . . ... . .. . ... . . . . ... . . . 505.02
xiv Contents in Detail

Paragraph
PART II - PARTNERSHIP AlloCATIONS
Chapter 6 - Allocation of P artnership Income Among the Partners: The
Substantial Economic Effect Requirem ent
Introduction ... . ...... . ...... . .... . . . .... . ...... . ...... . . . 601
The Partnership Agreement ls a Legal Contract .. . .. . ... . . . . ... . . . 602
General Require1nents for Substantial Economic Effect ... . . . . ... . . . 603
The First Require1nent: "Economic Effect" . . . ... . .. . ... . . . . ... . . . 604
General Rule . . ...... . .... . . . .... . ...... . ...... . . . 604.01
"Alternate" Test for Economic Effect .. . ...... . ...... . . . 604.02
Economic Effect Equivalence . . . .... . ...... . ...... . . . 604.03
The Economic Effect of Partnership Allocations Must Be "Substantial" . 605
Shifting Allocations Test . ... . . . . ... . .. . ... . . . . ... . . . 605.01
T ransitory Allocations Test .. . . . . ... . .. . ... . . . . ... . . . 605.02
Special Rule for Allocations of Future Gain on Disposition of
Partnership Property .. . .... . . . .... . . ..... . ...... . . . 605.03
Overall Tax Effects Test . .... . . . .... . ...... . ...... . . . 605.04
Allocating Partnership "Nonrecourse Deductions" . ...... . ...... . . . 606
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 606.01
. .m um Grun
M1n1 . ... .. .... ....... .. ..... ........ .... 606.02
Partnership Agreement Must Contain a "Minimwn Gain
Chargeback Provision" . . ... . . . . ... . .. . ... . . . . ... . . . 606.03
Identifying Nonrecourse Deductions Where the Partnership
Has Both Recourse and N onrecourse Indebtedness . ... . . . 606.04
Other Issues ... . .. . ... . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 607
T ransfer of a Partnership Interest .... . ...... . ...... . . . 607.01
Distributions Causing Code Sec. 734(b) Adjustme nts ... . . . 607.02
Nondeductible, Noncapital Expenditures ...... . ...... . . . 607.03
Guaranteed Payments . . .... . . . .... . ...... . ...... . . . 607.04
AdjustJnents Where Guidance ls Lacking ..... . ...... . . . 607.05
Optional Revaluation of All Property and Capital Accounts .. 607.06
Summary and Concluding Re1narks .... . . . .... . ...... . ...... . . . 608
Chapter 7 - Allocation of Incom e and Deduction s from Contributed
Property: Code Sec. 704(c)
Introduction ... . ...... . ...... . .... . . . .... . . ..... . ...... . .. 701
Anti-abuse Rule ...... . .... . . . .... . ...... . ...... . .. 701.01
Traditional Method .... . ...... . .... . . . .... . ...... . ...... . .. 702
General ..... . ...... . .... . . . .... . ...... . ...... . .. 702.01
Ceiling Rule Lilnitation . .... . . . .... . . ..... . ...... . .. 702.02
Traditional Method with Curative Allocations ... . .. . ... . . . . ... . .. 703
Remedial Allocations Method . ... . . ... . . . . ... . .. . ... . . . . ... . .. 704
Special Rules .. . .. . ... . .. . ... . . ... . . . . ... . .. . ... . . . . ... . .. 705
Depreciation Methods . . . ... . . . . ... . .. . ... . . . . ... . .. 705.01
Small Disparities . . ... . . ... . . . . ... . .. . ... . . . . ... . .. 705.02
Aggregation of Properties ... . . . . ... . .. . ... . . . . ... . .. 705.03
 Contents in Detail xv
Paragraph
Code Sec. 704(b) Revaluations ....... . ...... . ...... . . . 705.04
Nontaxable Dispositions ..... . ..... . . ..... . ...... . . . 705.05
Proposed Regulations ...................................... . 706
Code Sec. 704(c) (1) (C) Basis Adjustment .............. . 706.01
Distribution by Partnership Holding Code Sec. 704(c) (1) (C)
Property ........... . ............................ . 706.02
Transfer of Code Sec. 704(c) (1) (C) Partner's Partnership
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706.03
Chapter 8 - Other Limitations on Partnership Allocations
Allocation of Partnership Income and Loss on Transfer or Change in a
Partner's Interest in the Partnership ... . . . .... . ...... . ...... . . . 801
General ..... . ...... . .... . . . .... . ...... . ...... . . . 801.01
Special Rules limiting Loss Allocations on Transfer or Change
in a Partner's Interest . . .... . . . .... . ...... . ...... . . . 801.02
Retroactive Allocations Among Newly Admitted and
Continuing Partners . . .......................... . . . 801.03
Allocations in Family Partnerships-Code Sec. 704(e) .... . ...... . . . 802
Allocations Within the Family ........ . ..... . ...... . . . 802.01
Principles Underlying Code Sec. 704(e) ............. . . . 802.02
Capital as a Material Income-Producing Factor ........ . . . 802.03
Donor's Reasonable Compensation ................... . 802.04
Donee's Status as the Owner of the Partnership Interest ... . 802.05
Purchasing Family Member's Status as a Partner ........ . 802.06
Gifts of Partnership Interest When Partnership Capital ls Not
a Material Income-Producing Factor .................. . 802.07
Nonpartner Family Member Performs Services for the
Partnership ............... . ..................... . 802.08
Estate Tax Planning with Family Partnerships ......... . . . 802.09
Depreciation Recapture ....... . ............................ . 803
Credits ................................................. . 804
Income Allocation Recharacterized as Payment for Capital Expenditure 805
Chapter 9 - Partner's Share of Partnership Debt
Introduction ... . ...... . ...... . .... . . . .... . ...... . ...... . . . 901
Partner's Share of Debt Included in Tax Basis ... . ...... . ...... . . . 902
AdjustJnents to Basis for Changes in Partner's Share of
Liabilities .... . ...... . .... . . . .... . ...... . ...... . . . 902.01
Contributions and Distributions of Encumbered Property . . . 902.02
What ls a "Liability" for Purposes of Code Sec. 752? ...... . ...... . . . 903
Debt vs. Equity ...... . .... . . . .... . ...... . ...... . . . 903.01
Additional Code Sec. 752 Require1nents ...... . ...... . . . 903.02
Classification of Partnership Liabilities as Recourse vs. Nonrecourse .. 904
Partner's Share of Partnership Recourse Debt ... . ...... . ...... . . . 905
Constructive Liquidation of the Partnership ... . ...... . . . 905.01
So1ne "Nonrecourse" Loans Recharacterized as Recourse
Loans . ...... . ...... . .... . . . .... . ...... . ...... . . . 905.02
xvi Contents in Detail

Paragraph
Proposed Regulations float Commercial Reasonableness
Standard for Recourse Debts ......... . .............. . 905.03
Partner's Share of Partnership Nonrecourse Debt ................ . 906
Nonrecourse Llabilities Allocated by Reference to Partner's
Profits Interests ...... . .... . . . .... . ...... . ...... . . . 906.01
. .m urn Grun
M1n1 . .... ..... .. ..... ... ..... .. ..... .. .. 906.02
Code Sec. 704(c) Minimum Gain ..................... . 906.03
"Excess " Nonrecourse Lla b"1lities
. . .... . ...... . ...... . . . 906.04
Multiple Properties Secured by Single Nonrecourse Liability 906.05
Proposed Regulations- "Llquidation Value Percentage" for
Allocation of NR Debt ............................. . 906.06
Reg. § 1.752-7 Liabilities (Contingent Llabilities) ........ . ...... . . . 907
General ..... . ...... . .... . . . .... . ...... . ...... . . . 907.01
Mechanics ... . ...... . .... . . . .... . ...... . ...... . . . 907.02
Sale or Transfer of an Interest in a Partnership with § 1.752-7
Llabilities .......... . ............................ . 907.03
Llquidating Distribution to§ 1.752-7 Partner or Distribution of
Property Secured by § 1.752-7 Llability to Another Partner .. 907.04
Exceptions ...................................... . 907.05
P ART 111 -1.JMITATIONS ON P ARTNERSIDP DEDUCTIONS

Chapter 10 - limitations on the Deductibility of P artnership Losses

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1001
Disallowed Losses Are Carried Forward . . . . . . . . . . . . . . . . . . . . . . . . 1002
Carryforwards Under Code Sec. 704(d) . . . . . . . . . . . . . . . . . 1002.01
Carryforwards Under Code Sec. 465 . . . . . . . . . . . . . . . . . . . 1002.02
Carryforwards Under Code Sec. 469 (Passive Loss
Carryforwards) ................................ . . . 1002.03
The Basis Limitation of Code Sec. 704(d) ....... . ...... . ...... . . . 1003
Losses Cannot Exceed Tax Basis . .... . ...... . ...... . . . 1003.01
Accounting for Debt .. . .... . . . .... . ...... . ...... . . . 1003.02
Nonrecourse Debt .... . .... . . . .... . ...... . ...... . . . 1003.03
Code Sec. 465-Losses Cannot Exceed Taxpayer's "At-risk" Amount .. 1004
Passive Loss Llmitations- In General ......................... . 1005
General ........................................ . 1005.01
Passive Activity Losses Can Be Deducted Only Against
Passive Activity Income . .... . . . .... . ...... . ...... . . . 1005.02
Passive Activity Credits . .... . . . .... . ...... . ...... . . . 1005.03
Classification of Income Under Code Sec. 469 ... . ...... . ...... . . . 1006
General ...... . ........................ . ...... . . . 1006.01
Gain fro1n Sale or Disposition of Property ............ . . . 1006.02
Gain fro1n Sale of an Interest in a Partnership ......... . . . 1006.03
Special Rule for Substantially Appreciated Property ..... . . . 1006.04
Classification of Expenses and Deductions Under Code Sec. 469 ... . . . 1007
Taxpayers to Who1n Code Sec. 469 Applies . .... . ...... . ...... . . . 1008
 Contents in Detail xvii

Paragraph
Passive Activities Defined ......................... . ...... . . . 1009
Material Participation- the "500 Hour" Rule .. . ....... . . . 1009.01
Alternative Standards for Material Participation . ...... . . . 1009.02
Defining Participation ........................... . . . 1009.03
LiJnited Partners .......... . . . .... . . ..... . ...... . . . 1009.04
Rental Activities ...... . .... . . . .... . ...... . ...... . . . 1009.05
Real Estate Professionals ........................... . 1009.06
Exe1nption for Rental Activities in which Taxpayer "Actively"
Participates .. . ...... . .... . . . .... . ...... . ...... . . . 1009.07
Activities That Are Not Passive Activities . . . .... . ...... . ...... . . . 1010
Recharacterization of Certain Passive Activities as Nonpassive .... . . . 1011
Operating Rules ........................................ . . . 1012
Calculation and Use of Carryforwards . . ...... . ...... . . . 1012.01
Installment Sales .... . ................... . ...... . . . 1012.02
Gifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1012.03
Dispositions by Death . . .... . . . .... . ...... . ...... . . . 1012.04
Grouping Activities ...... . .......... . . . .... . ...... . ...... . . . 1013
General ................... . .... . ...... . ...... . . . 1013.01
Appropriate Economic Units . . . . .... . ...... . ...... . . . 1013.02
LiJnitations on Grouping Certain Activities .... . ...... . . . 1013.03
Consistency ls Required ......................... . . . 1013.04
P ART IV-SALES AND D ISTRIBUTIONS
Chapter 1 1 - Sale of a Partnership Interest
Introduction ... . ...... . ...... . .... . . . .... . ...... . ...... . . . 1101
Amount Realized .................... . .... . ...... . ...... . . . 1102
Adjusted Basis in Partnership Interest .. . . . .... . ...... . ...... . . . 1103
General Rule . . ...... . .... . . . .... . ...... . ...... . . . 1103.01
Alternate Rule ...... . ............................ . 1103.02
AdjustJnents to Basis to Reflect Changes in a Partner's Share
of Liabilities .. . ...... . .... . . . .... . ...... . ...... . . . 1103.03
Ordinary Income from the Sale of an Interest in the Partnership ... . . . 1104
Definition of Unrealized Receivables ................ . . . 1104.01
"Inventory Ite1ns" Defined ... . . . .... . ...... . ...... . . . 1104.02
Tiered Partnerships ... . .... . . . .... . ...... . ...... . . . 1104.03
Enforcement ........................... . ...... . . . 1104.04
Comparison with Code Sec. 341 . . .... . ...... . ...... . . . 1104.05
Collectibles and Unrecaptured Code Sec. 1250 Gain ..... . ...... . . . 1105
Collectibles Gain ........................ . ...... . . . 1105.01
Unrecaptured Section 1250 Gain . .... . ...... . ...... . . . 1105.02
Installment Sale of a Partnership Interest . . . .... . ...... . ...... . . . 1106
Abandonments and Gifts of a Partnership Interest . . ..... . ...... . . . 1107
like-Kind Exchanges of Partnership Interests ... . ...... . ...... . . . 1108
Code Sec. 1031 (a) (2) (D) .... . . . .... . ...... . ...... . . . 1108.01
xviii Contents in Detail

Paragraph
Planning for Exchanges of Some Partnership Property and
Sale of Other Partnership Property .... . .............. . 1108.02
Change in Status ...... . ...... . .... . . . .... . ...... . ...... . . . 1109
Miscellaneous Partnership Interest Transfer Issues ...... . ...... . . . 1110
Chapter 1 2 - Partnership Distribution s
Introduction ... . ...... . ...... . .... . . . .... . ...... . ...... . . . 1201
. or "Current"D"1stri"b utions
0 perating . .......................... . 1202
Cash Distributions- Effect on Basis and Recognition of Gain 1202.01
Mid-year Advances and Partner "Draws" ...... . ...... . . . 1202.02
Property Distributions- Consequences to the Partnership . ...... . . . 1203
Partner's Basis in Distributed Property ......... . ............ . . . 1204
General Rule- Carryover Basis .................... . . . 1204.01
Effect of Prior Partnership-level Basis Adjustments ....... . 1204.02
Character and Holding Period of Distributed Property .... . 1204.03
Receipt of Multiple Properties . . ...... . .............. . 1204.04
liquidating Distributions ................................. . . . 1205
Recognition of Gain or Loss by Distributee Partner ..... . . . 1205.01
Property Distributions and Determination of Basis ..... . . . 1205.02
Disproportionate Distributions-Results to Partner and Partnership
When the Partner's Share of Ordinary Income Assets ls Affected .... . 1206
Proposed Regulations Introduce "Hypothetical Sale" Approach ...... . 1207
Determining Whether Code Sec. 751(b) Applies . ...... . . . 1207.01
Determining the Tax Consequences of a Code Sec. 751(b)
Distribution under the 2014 Proposed Regulations ....... . 1207.02
Effect of Code Secs. 704(c) and 743(b) .............. . . . 1207.03
Unrealized Receivables Defined .. . .... . . . .... . ...... . ...... . . . 1208
Substantially Appreciated Inventory Ite1ns Defined ...... . ...... . . . 1209
Examples- Application of Code Sec. 751 (b) under the 1956 Regulations.
1210
Distribution of Marketable Securities ... . . . ........... . ...... . . . 1211
Definition of Marketable Securities .... . . . .... . ...... . ...... . . . 1212
Basis in Securities Distributed, Partnership Interest, and Assets
Remaining in the Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1213
Coordination with Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1214
Chapter 13 - Basis Adjus tments to Partnership Property-Code Secs.
734(b), 743(b)
Basis Adjustment to Partnership Property- Code Sec. 743(b) Basis
AdjustJnents ... . ...... . ...... . .... . . . .... . ...... . ...... . . . 1301
Code Sec. 743 (b) Transfers .. . . . .... . ...... . ...... . . . 1301.01
Code Sec. 743 (b) Adjustments- Overview ............. . 1301.02
Partnerships with "Substantial Built-in Loss" Immediately
Following Transfer of an Interest ...... . .............. . 1301.03
Partnerships Without Substantial Built-in Losses . ...... . . . 1301.04
Making the Code Sec. 743(b) Adjustment ..... . ...... . . . 1301.05
 Contents in Detail xix

Paragraph
Distribution of Property with Code Sec. 743(b) Adjustments. 1301.06
Transfer of Partnership Interests with Existing Code Sec.
743 (b) Adjustments ... . .... . . . .... . ...... . ...... . . . 1301.07
Compliance Require1nents Under Code Sec. 754 . ...... . . . 1301.08
Partner-Level Code Sec. 743(b) Adjustments- Code Sec.
732(d) ................... . ...... . .............. . 1301.09
Proposed Regulations . . .... . . . .... . ...... . ...... . . . 1301.10
Technical Tenninations ........................... . ...... . . . 1302
Consequences of Partnership Termination .... . ...... . . . 1302.01
Other Consequences .. . .... . . . .... . ...... . ...... . . . 1302.02
Partnership Basis Adjustments Following Distributions of Property .. . 1303
No Code Sec. 754 Election in Effect ........................... . 1304
Code Sec. 754 Election in Effect or Substantial Basis Reduction .... . . . 1305
Alnount of the Adjustment ... . . . .... . ...... . ...... . . . 1305.01
Allocation of Code Sec. 734(b) Adjustment Among
Partnership Property ............................ . . . 1305.02
Substantial Basis Reduction ... . ................... . . . 1305.03
P ART V-ADVANCED TOPICS

Chapter 14 - Disguised Sales

Introduction ... . ...... . ...... . .... . . . .... . ...... . ...... . . . 1401
Tax Treabnent of Sale of Property to the Partnership by a Partner .. . . . 1402
Sale at a Gain .. . ................................. . 1402.01
Sale at a Loss ........................... . ...... . . . 1402.02
Property Contributions Treated as Disguised Sales ...... . ...... . . . 1403
In General ... . ...... . .... . . . .... . ...... . ...... . . . 1403.01
Contributions Related to Distributions-The Facts and
Circumstances Test of Code Sec. 707 (a) (2) (B) .......... . 1403.02
Exceptions: Code Sec. 707 Not Applicable to Certain
Payments .... . ...... . .... . . . .... . ...... . ...... . . . 1403.03
Effect of liabilities .... . .... . . . .... . ...... . ...... . . . 1403.04
Treatment of Qualified Liabilities when Transfer Is Treated as
Part of a Sale .................................... . 1403.05
Disguised Payment for Services ..................... . 1403.06
Partner Contributes Property and Partnership Distributes It to Another
Partner-Code Sec. 704(c) (1) (B) . . .... . . . .... . ...... . ...... . . . 1404
Recognition of Gain or Loss .... . .... . ...... . ...... . . . 1404.01
Character of Gain or Loss .... . ...... . ............ . . . 1404.02
Basis Rules .. . ...... . .... . . . .... . ...... . ...... . . . 1404.03
Special Rules for Constructive T ermination of Partnerships . 1404.04
Exceptions ...................................... . 1404.05
Contributor Receives like-kind Property in Same Distribution
1404.06
Partner Contributes Property and Partnership Distributes Other
Property to the Partner-Code Sec. 737 . . . . .... . ...... . ...... . . . 1405
xx Contents in Detail

Paragraph
Mechanics .................................... . . . 1405.01
Net Pre-contribution Gain ........................ . . . 1405.02
Basis Rules Following Application of Code Sec. 737 . . ... . . . 1405.03
Character of Gain ............................... . . . 1405.04
Code Sec. 737 not Triggered if Contributed Property
Distributed Back to the Contributor .. . .. . ... . . . . ... . . . 1405.05
Constructive Tenninations of the Partnership .. . . . . ... . . . 1405.06
Hierarchy of Statutes .............................. . 1405.07
Chapter 15 - Death o r Re tireme nt of a Partner
Introduction ... . .. . ... . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 1501
Payment for Retiring General Partner's Interest in a Partnership When
Capital Is Not a Material Income-Producing Factor ..... . ......... . 1502
vVhen Is Capital a Material Income-Producing Factor? .. . . . 1502.01
Retired Partner Defined . . ... . . . . ... . .. . ... . . . . ... . . . 1502.02
Payments for Retiring Partner's Share of Unrealized
Receivables- Code Sec. 736(a) ...................... . 1502.03
Payments for Retiring Service Partner's Share of Goodwill-
Code Sec. 736(a) or (b) . . ... . . . . ... . .. . ... . . . . ... . . . 1502.04
Payments for Property Other Than Unrealized Receivables
and Goodwill- Code Sec. 736(b) ..................... . 1502.05
Allocating the Payinent Alnong Code Sec. 736 Categories .. . 1502.06
Accounting for a Series of Payinents .................. . 1502.07
Allocating Property Distributions Between Code Sec. 736(a)
Payments and Code Sec. 736(b) Payinents . ... . . . . ... . . . 1502.08
Passive Gain or Loss ............................ . . . 1502.09
Effect of Code Sec. 754 Election ...................... . 1502.10
Classification of Retirement Payinents as Self-Employinent
Income . . ... . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 1502.11
Payment for Retiring Partner's Interest \II/hen Capital Is a Material
Income-Producing Factor or Partner Is a Lunited Partner .......... . 1503
Partnership Interest Sale Compared to Liquidation . ............ . . . 1504
Cha pte r 16 - S Corpo ratio n s
Eligibility, Election, and Formation ......................... . . . 1601
Eligibility ................ . . . .... . ...... . ...... . . . 1601.01
Election . . ... . .. . ... . . ... . . . . ... . .. . ... . . . . ... . . . 1601.02
Corporate Contributions . ... . . . . ... . .. . ... . . . . ... . . . 1601.03
S Corporation Method of Accounting and Taxable Year ... . 1601.04
Taxation of S Corporations ............ . ...... . .............. . 1602
Built-in Gains Tax . ... . . ... . . . . ... . .. . ... . . . . ... . . . 1602.01
Tax on Excess Net Passive Investment Income . . . . . ... . . . 1602.02
LIFO Recapture ................................ . . . 1602.03
Penalties for Failure to File ......... . . ..... . ...... . . . 1602.04
General Business Credit Recapture ... . .. . ... . . . . ... . . . 1602.05
Treatment of Income by the Shareholder . . . . ... . .. . ... . . . . ... . . . 1603
 Contents in Detail xxi

Paragraph
Allocation Among Shareholders ............ . ...... . . . 1603.01
Pass-through of Items to Shareholders . ...... . ...... . . . 1603.02
Deduction or Exclusion Limitations at the Shareholder Level 1603.03
Loss Limitations· Basis ............................ . 1603.04
Loss Limitations· At Risk .......... . ...... . ...... . . . 1603.05
Loss Limitations - Passive Activity .... . ...... . ...... . . . 1603.06
Treatment of S Corp Distributions to Shareholders ...... . ...... . . . 1604
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1604.01
Distributions-S Corp has no Prior Year E&P .. . ...... . . . 1604.02
Distributions-S Corp has Prior Year E&P .... . ...... . . . 1604.03
Accu1nulated Adjustments Account (AAA) .... . ...... . . . 1604.04
Distributions of Property ..... . ...... . ..... . ...... . . . 1604.05
Distributions in Redemption of Stock . . ...... . ...... . . . 1604.06
Termination of Election . . ...... . .... . . . .... . ...... . ...... . . . 1605
General ............ . .... . . . .... . ...... . ...... . . . 1605.01
Revocation ......... . .......................... . . . 1605.02
T ermination via Violation of Eligibility Requirements ... . . . 1605.03
T ermination Due to Excess Passive Investment Inco1n e . . . . 1605.04
Effective Date of Termination . . ...... . .............. . 1605.05
Reelection of S Status Following a T ermination ........ . . . 1605.06
Tax Administration ..... . ...... . .... . . . .... . ...... . ...... . . . 1606
Page
Appendix ..... . . ..... . . ..... . .... . . . .... . ...... . ...... . . . 515
Case Table .... . ...... . ...... . .... . . . .... . ...... . ...... . . . 549
Finding Lists .. . ...... . ...... . .... . . . .... . ...... . ...... . . . 555
Index ........ . ...... . ...... . .... . . . .... . ...... . ...... . . . 571

Please visit http://www.cchgroup.coni/ Resources for any periodic updates or

clarifications that may beco1n e available related to the Practical Guide to
Parl11erships and UCs as well as CCH's Daily Tax Day News, Tax Briefings and
other items of interest.
 1

PART I

BASIC PARTNERSHIP OPERATIONS

 3

Chapter 1

lVhat Is a Partnership?
, 110 1 Introduction
, 110 2 Classification of Partners hips
, 110 3 Advantages and Disadvantages of Operating as a Partnership
, 1104 Tax Issues Involving Classification of LLCs as Partnerships
, 110 5 IRS Reclassification
, 110 6 Distinguishing Partnerships from Other Relationships

1f 101 Introduction
For legal purposes a business activity may be conducted in various forms,
ranging from a sole proprietorship to a partnership to a corporation. Along that
continuum, a jointly held activity can be conducted as a tenancy in common, a
general partnership, a limited partnership, a limited liability co1npany, a limited
liability partnership, a !united liability limited partnership, a professional corpora-
tion, a C corporation, or a publicly traded partnership. The arrdy of available entities
in which a business can operate is more diverse than ever, and taxpayers should
take into account both tax and nontax considerations when selecting the entity for
their business.
A partnership is an association between two or 1nore persons who join to carry
on a trade or business for profit. Each person contributes money, property, labor or
skill, and expects to share in the profits and losses of the business. As indicated
above, the laws of different states provide for several different kinds of partner-
ships. A general partnership is one in which every partner has unllinited liability for
the debts of the partnership. A li111ited partnership is one in which at least one
partner's liability for the debts of the partnership is limited to that partner's
investment in the partnership. Any partner with such llinited liability is a limited
partner, and any partner with unlimited liability is a general partner. Unlike limited
partners, general partners also are able to participate in the manage1nent of the
partnership.
A limited liability partnership (LLP) is a type of generdl partnership in which all
of the partners (all of which are general partners) are protected at a minimum from
personal liability for negligent acts co1nmitted by other partners or by e1nployees
not under his or her direct control. Some states allow general partners in an LLP
essentially the same protection as limited partners would have. The use of this type
of partnership is often restricted to professional partnerships such as law firms and
1)101
4 P ractical Guide to Partnerships and LLCs

accounting firms. A li111ited liability li111ited partnership (LLLP) is generally a limited

partnership that elects to become an LLP as well, thus affording the general
partners the same protection from liability as an LLP does. A li111ited liability
conipany (LLC) is an extremely popular type of entity whose owners can all
participate in the management of the business, but who also are all given protection
from the liabilities of the LLC (except to the extent of their investment in the LLC).
Although not legally a partnership, most LLCs are treated as partnerships for tax
purposes.
Just because an entity is legally a partnership does not mean that it will be
taxed as a partnership. The legal treatment of an entity is determined under state
and local laws, while the federal income tax treatment is detennined under the
federdl income tax laws. Often a business will have the same entity for both federal
income tax purposes and legal purposes, but many businesses have different
entities for federal income tax and legal purposes. A business that is classified as a
partnership under state law, for example, can generally elect to be treated as a
corporation for federal income tax purposes, if the owners don't want it to be taxed
as a partnership. In addition, joint owners of property may be classified as tenants-
in-common for legal purposes but as a partnership for federdl income tax purposes.
It should also be noted that while the income tax syste1n defines certain
categories of entities that exist only for income tax purposes, such as S corpora-
tions, 1nany types of legal entities do not have a separdte, specifically defined
counterpart for income tax purposes. Lunited liability co1npanies and limited liabil-
ity partnerships, for example, exist under state law but are usually treated for
federdl income tax purposes much the same as any partnership would be. This is
true even though they share 1nany characteristics with corporations (e.g., limited
liability, unllinited life, etc.).
There are three general sets of regulatory rules that classify entities as a
partnership for tax purposes versus something other than a partnership (e.g., a
corporation, trust or sole proprietorship):
1. The rules which are commonly referred to as the "check-the-box" classifi-
cation rules· 1
'
2. The "anti-abuse" rules;2 and
3. Rules which allow inveshnent joint venturers to choose whether to be
partnerships or tenancies-in-common. 3
The check-the-box regulations are by far the most important of these, and they
allow taxpayers to choose whether to treat partnerships and other unincorporated
entities which are not partnerships (e.g., LLCs) as either corporations or partner-
ships for federal income tax purposes. The anti-abuse rules allow the IRS to
recharacterize something the taxpayer is treating as a partnership as something
other than a partnership. The third rule allows simple partnerships that resemble

1 Reg. § §301.nOl·l. ·2. and ·3. 3 Reg. § 1.761·2.

-? Reg. § 1.701·2.

'fl 101
 \Vhat Is a Partnership? 5
jointly owned investments to elect to treat themselves not as partnerships, but as
tenants-in-common for tax purposes.
In addition, there is substantive case law distinguishing a partnership from
other business arrangements, such as debtor-creditor or e1nployee-employer
relationships.
1f 102 Classification of Partnerships
The "check-the-box" regulations are so called because the entity is allowed to
choose their tax treatment by checking a certain box on Form 8832, Entity
Classification Election. The check-the-box regulations allow considerable flexibility
in what entity a business chooses for federal income tax purposes, with one
exception: a business activity incorporated under the law of any st-ate, federal, or
foreign jurisdiction 1nust be treated as a corporation for federal income tax pur-
poses. If the shareholders of that corporation prefer a tax treatment similar to a
partnership, then they should make an S election. However, the fact that the
business is incorporated under state law will make it impossible for it to choose to
be treated as a partnership for federal income tax purposes.
For unincorporated entities the check-the-box regulations allow much more
flexibility. While the default classification of unincorporated entities is usually to be
treated as a partnership, a jointly owned, unincorporated, profit-motivated domestic
business entity (such as a limited liability company or partnership) may elect to be
a corporation for tax purposes.
Example 1-1: Clara and Ernie Majors are married and own a hardware
store. Ernie operates the hardware store. He reports the tax results on
Schedule C, Fonn 1040. The Majors would like to fonn an S corporation for
federal income tax purposes, but they don't want the trouble and expense of
incorporating and following the other corporate formalities. Clara and Ernie
enter into a partnership, contributing the hardware business and all related
assets to the partnership. The partnership files Form 8832, indicating that it
elects to be a corporation for federal income tax purposes. It then files Form
2553, Election by a Small Business Corporation, and thereby elects to be
treated as an S corporation for tax purposes. By electing to be classified as an S
corporation, pass-through income (in excess of reasonable compensation) will
not be subject to the self-employment or Medicare taxes.
If an eligible unincorporated organization does not elect to be a corporation,
then it is by default a partnership for tax purposes. As a partnership, the organiza-
tion will be required to file a Form 1065, U.S. Return of Partnership Income, each
year by the 15th day of the fourth 1nonth after the close of the taxable year (15th
day of the third month for taxable years beginning after 12/31/15). For calendar
year partnerships this 1neans that the Form 1065 1nust be filed by April 15 of the
following year.4 A partnership is allowed an automatic five-month extension of the
time allowed for filing Form 1065 (six months for taxable years beginning after
12/31/15). The extension application must be made on Form 7004 and it must be
4 Code Sec. 6072(a) and (b): Reg. § J.6031(a)-l(e)(2).

1)102
6 P ractical Guide to Partnerships and LLCs

filed by the unextended due date of the Form 1065, but it does not have to contain a
reason for the requested extension. 5
A single member unincorporated entity is treated as a "disregarded entity"
unless it elects to be a corporation. It cannot be treated as a partnership. For
exainple, a single 1nember LLC owned by an individual will be treated as a sole
proprietorship unless the individual elects to be treated as a corporation. Its
business income and expenses will be reported on the individual's Schedule C,
Form 1040, and its rental income or Joss will be reported on the individual's
Schedule E, Form 1040. A corporation which owns a single member LLC would
report its results as if it were a branch if it didn't elect to treat the LLC as a separate
corporate subsidiary.

5 Reg. § l.608!·2T.

'fl 102
 \Vhat Is a Partnership? 7
301. 7701-3 Regulations
(Effective for Entities Formed on or After January 1, 1997)6

I ls the entity a trm't'?

I
YES
TRUST

NO
. APPLY
Is the entity subjea t0
YE:s
special rules (e.g., SPECIAL RULES
REMICs. REJT(s)7

r NO
Is the entity an .. eligible CORPORATION
entity"'? ' NO

' YES .
Is the entity organized Does any Does the cntily CORPORATION
NO ' NO' have only one NO UNLESS IT
under domestic law'! member have
unlimited owner'? ELECTS TOBE
YES liability? A
YES PARTNERSHIP
YES
CORPORATION
UNLESS IT
ELECTS TOBE
DISREGARDED
"
Does the entity have only NO
one owner?

YES
" "
Does the entity have ENTITY IS
two or more owners? NO DISREGARDED UNLESS
IT ELECTS TO BE A
CORPORATION
PARTNERSHIP
YES
. UNLESS IT ELECTS
TOBE A
CORPORATION

For entities in existence prior to January 1, 1997, their previously clai1ned

classification will generally be respected for periods prior to that date if it was
reasonable under the prior rules.7
1f 103 Advantages and Disadvantages of Operating as a
Partnership
Flo,v-through taxation. Partnerships are a very popular form of business
entity, especially fro1n a tax perspective. The prilnary advantage of operating as a
partnership for tax purposes is that although the partnership must file a tax return,

6 An ..eligible entity" is any organization not deemed a 7 Reg. §30J.7701-3(h)(2).

corporation per Reg. §30J.7701·2(b)(l). (3), (4), (5). (6).
(7), or (8) .

1)103
8 P ractical Guide to Partnerships and LLCs

a partnership is not taxable; the income from the partnership flows through to the
partners and is recognized by them in the same character as it was recognized by
the partnership (as ordinary income or capital gain, for example). This can have
two positive effects. First, the income of the partnership is only taxed once at the
partner level, unlike the double taxation that corporate shareholders 1nust suffer.
Second, if the partnership has a loss the partner will be able to deduct their share of
the loss (subject to basis, at-risk, and passive loss limitations), whereas a share-
holder in a regular C corporation can't deduct their share of a corporate loss. It
should be noted, however, that since an S corporation is also a flow-through entity
an S corporation shareholder would be able to deduct their share of an S corpora-
tion loss. It should also be noted again that an entity does not have to be a
partnership to be taxed as one. LLCs are co1runonly taxed as partnerships, as are
specific types of partnerships such as LLPs and LLLPs.
Property distributions. Another often overlooked tax advantage of operating
as a partnership is that it can be much less expensive to get assets (especially
appreciated non-cash assets) out of a partnership than it is to get them out of a
corporation. Generally, distributions of property from a partnership are tax-free to
both the partnership and the partner, although distributions of cash can result in
gain to a partner. Distributions of property from a corporation, however, are
dividend income to the shareholder, and will result in taxable gain to the corpora-
tion if the assets distributed are appreciated.
Tax-free formation. It can also be less expensive from a tax perspective to
form a partnership than it is to form a corporation. The require1nents of Code Sec.
351 must be met in order for the formation of a corporation (whether it is taxed as a
C corporation or an S corporation) to be tax-free. This means generally that
property must be contributed, stock must be received, and SO-percent control must
be owned by the contributors after the contribution. No such requirements exist for
partnerships. Contributions of property to partnerships are generally tax-free unless
the net liabilities the partner is relieved of due to the contribution exceed the
partner's basis in their partnership interest.
Special allocations. A partnership also has the advantage of being able to
specially allocate items of income or deduction to different partners. All of the
depreciation on a building can be allocated to just one partner, for example.
Although there are detailed rules limiting the circumstances under which this can
be done and the amounts that can be specially allocated, special allocations are
co1runonly used to make investment in a partnership 1nore attrdctive to high-tax
bracket partners. Shareholders in corporations, whether they are C corporations or
S corporations, can't be specially allocated items of inco1ne or deduction.
Unlimited liability. Partnerships usually have the disadvantage of not shield-
ing the general partners from the liabilities of the partnership. This is a major
disadvantage for the general partners, and is one reason why so 1nany businesses
are now operated as LLCs. LLCs generally are taxed as partnerships, but their
owners are shielded from the liabilities of the entity.
Self-employment income. A disadvantage of being taxed as a partnership is
that any trade or business income of the partnership is taxed to the general
partners as self-e1nployment income, subject to the self-employment tax. Guardn-
teed payinents for services provided by limited partners are also treated as self-
'fl 103
Another Random Scribd Document
with Unrelated Content
Could Mrs. Sefton have taken the letter? No: the idea was ridiculous.
She was too much absorbed in her own sorrows to have leisure for
the gratification of an idle and impertinent curiosity. Besides, was
she a common thief?—for, let a lady be possessed with ever so
prying a disposition, she would not carry her mania to such a point
as to steal a letter—a sealed letter—unless she were absolutely
dishonest and unprincipled. Surely this could not be the character of
the woman whom he had seen in such deep affliction that evening,
—a woman who was assuredly what she had represented herself to
be, and whose appearance, manners, and language all forbade the
idea that she was an abandoned wretch.

“No—I wrong her by entertaining such an injurious suspicion even

for an instant!” thought Lord William, when those reflections had
passed through his brain. “It is impossible that this afflicted lady can
have taken my letter. Besides, had she done so, would she have
waited until my return? And again, of what use—of what benefit
could the letter be to her?”

He glanced around, and beheld several articles of value lying about

in their accustomed places. He had gone out in such a hurry that he
had left a purse containing gold upon the mantel—and,
remembering the precise amount, he reckoned it and found it to be
correct. Lying upon the table was a splendid gold seal, which he had
used in closing the letter that was now missed:—in fine, there were
numerous objects, either costly or curious, which an ill-disposed
person might have self-appropriated, but all of which had been left
untouched.

How, then, was it possible to suppose that Mrs. Sefton had purloined
the letter?

Nevertheless, it had disappeared; and therefore some one must

have taken it?—or else some accident must have happened whereby
it was lost?

Trevelyan racked his brain to discover whether it was possible that

he himself had removed it from the mantel after he had placed it
there: but he felt assured that during the interval which elapsed
between the writing of that letter and the arrival of Mrs. Sefton, he
had not quitted the apartment.

The affair was most mysterious: nay—it was also alarming;—for how
could he possibly account for the disappearance of a sealed letter? If
it had indeed been taken by an ill-disposed person, the contents
might be made known—perhaps to the prejudice of his suit with
Agnes. But he was assured that no one had entered the room during
his absence;—and he was so reluctant to fix the deed on Mrs.
Sefton, and had so many reasons against such a supposition, that he
became equally confident she was in no way connected with the
strange occurrence.

At length he reasoned himself into the belief that he must have

deposited the letter in some place which he could not recollect; and,
as he had in the first instance made a rough draught, he resolved to
write a fair copy all over again. This was soon accomplished; and,
having sealed and addressed it, he took the new letter with him to
his own bed-chamber, so that he might retain it in security until Mrs.
Mortimer should call for it in the morning.

It was past two o’clock when Lord William retired to rest; but,
though much fatigued, he could not immediately close his eyes in
slumber. The affair of the letter haunted him—filled him with vague
and undefined misgivings—and assumed an aspect the more
mysterious, the longer he contemplated it. He endeavoured to
persuade himself that the belief to which he had ere now
temporarily lulled his mind was the real solution of the theory: but
then would come the evidence of memory, proclaiming that he had
placed the letter on the mantel in the parlour, and that he had not
touched it afterwards.

In fine, he was bewildered amidst a variety of conflicting thoughts—

and his brain grew wearied with the agitation which their jarring
contention produced,—so that at length sleep stole upon him
insensibly: but though it sealed his eyes in slumber, it did not protect
him against the troubled dreams that visited his pillow.

At about nine o’clock in the morning he was awakened by the

entrance of his valet, who came to inform him that Mrs. Mortimer
had called for a letter which was to be in readiness for her.
Trevelyan started up and glanced anxiously towards the night-table,
almost dreading lest that second billet should have disappeared as
well as the first:—but it was there in safety—and he now desired his
dependant to deliver it to Mrs. Mortimer.
 CHAPTER CLXVII.
THE LAWYER.

Mr. James Heathcote, the attorney, was seated at a writing-table

covered with papers, in his private office. He was wrapped in a loose
dressing-gown, and his feet were thrust into large buff slippers. His
grey hair was uncombed and his beard unshaven that morning; and
his shirt was none of the cleanest. Indeed, his appearance denoted
that, on awakening, he had risen hastily, thrown on a few clothes,
and repaired straight to his office, where he immediately became
absorbed in the study of certain documents in which he was deeply
interested.

The countenance of this individual was by no means pleasing. A

malignant light shone in his small, restless, dark eyes; and he had a
habit, when vexed or irritated, of frowning—or rather contracting his
brow to such a degree, that he brought them as it were to cover his
very eye-lids: but, if pleased—especially when he had solved a
difficult question or was struck by an idea that seemed particularly
lucid or valuable—he would then elevate his brows to such a height
that the movement displayed the whites all round his eyes, while the
upper part of his forehead gathered into innumerable small wrinkles.

A superficial observer would have pronounced the expression of his

pale features to be intellectual: but a more experienced phrenologist
would be enabled to draw the proper distinction between an air of
noble intelligence and one of profound cunning, shrewdness, and
selfish watchfulness. These latter qualities were the real
characteristics of James Heathcote: but with his clerks, and amongst
the generality of his clients, he passed as a man of very fine intellect
and great talents.

The room in which he was seated had what is usually called “a

business-like air” about it. The grey drugget that covered the door
would have sustained no harm from a vigorous application of a
carpet-broom; and the window, which looked into a little yard at the
back of the house, might have lost much of its dinginess if only
cleaned once a week. But the panes appeared as if they had been
purposely tinged a dirty yellow, so incrusted were they with the dust
that had gathered upon them.

On one side of the room were rows of shelves containing a number

of law-books, the relative ages of which were marked by the colour
of the leather binding—there being a perfect ascending scale, from
the bright buff, indicating the most recent purchase, to the deepest,
dirtiest brown that characterised the long-standing and well-
thumbed volume of remote date. Along the edges of these shelves
were nailed long slips of dark-green serge—a meagre kind of drapery
meant to protect the upper part of the volumes from the dust, and
impart to the whole arrangement somewhat of the air of a regular
book-case.

On another side of the room were rows of shelves much deeper and
also much wider apart; and on these were huge japanned tin boxes,
with names painted on them in yellow letters. To every box there
was a little padlock; and the whole seemed to tell of title-deeds to
vast estates—and mortgages—and bonds—and charges—and rent-
rolls, contained in those sombre-looking repositories. But, alas! how
few of the persons whose names were still recorded on the outside
of those boxes, had any longer an interest in the deeds preserved
within: how many had lodged their parchments in those usurious
chests, never to recover them!
Over the mantel-piece was a portrait of Lord Eldon—a lawyer whom
thousands and thousands were doomed to curse, but whom the
“profession” still continues to cry up as the greatest of modern
judges. Yes—for if clients complain of the law’s delays, the lawyers
themselves rejoice; and he who is an execrable judge in respect to
the former, is an admirable one in the eyes of the latter.

Stuck into the frame of that portrait was an infinite number of

visitors’ cards, all covered with dust, as if that assemblage of bits of
pasteboard were something sacred which the profane hand of a
housemaid or charwoman dared not touch. On the mantel itself was
an old time-piece, the mechanism of which was exposed; and how
the wheels could move at all, clogged with dust as they were, must
have appeared marvellous to any one who, entering that room, gave
himself the trouble to devote a thought to the matter.

We have already stated that the table was covered with papers.
Along that side opposite to the one at which the lawyer sate, were
piles of those documents, all tied up in the usual fashion with tape
that once was red, but which was now so faded that in many
instances it was of a dirty white. They seemed to have been
undisturbed for a long, long time; and perhaps were kept for show.
Those papers that referred to matters actually pending, were placed
more conveniently within the attorney’s reach, and were fresher in
appearance, the tape also being of a livelier red. Three or four files,
two feet long, and covered with letters densely packed one above
another, lay upon the drugget; and near the lawyer’s feet was a
waste-basket overflowing with letters crumpled up, and looking
uncommonly like appeals for mercy and delay on the part of
unfortunate debtors, but which had been tossed with cool contempt
into that receptacle for all such useless applications!

It was now ten o’clock in the morning; and Mr. James Heathcote
was, as we have represented, completely absorbed in the study of
the documents that lay spread before him upon the table. A thin,
yellow hand supported his head; and every now and then he ran his
long fingers through his iron-grey hair, as if that action aided him in
the solution of a difficult subject.

Presently a low and timid knock at the door fell on the lawyer’s ears;
and he said “Come in” without raising his head or desisting from his
occupation.

Thereupon a middle-aged man, dressed in a suit of rusty black—his

office garb—made his appearance, holding in his hand a long thin
book which was the diary of the business-proceedings of the
establishment. This individual had a pale, sinister countenance, with
brown hair combed sleekly down over his low forehead. He was,
however, an important personage in many respects—being Mr.
Heathcote’s head clerk, and exercising despotic sway over half-a-
dozen subordinates in the front office. With them and towards poor
clients or unfortunate debtors he was cold—stern—harsh—and
inexorable; but in the presence of his employer he was cringing—
mean—sycophantic—and spaniel-like.

Advancing slowly and with noiseless steps—or rather creeping up

towards the table, he stood in a respectful attitude—no, with a
servile demeanour and in deep silence until it should please his
master to take notice of him.

“Well, Green—what have you to say to me this morning?” at length

demanded Mr. Heathcote, raising his head and throwing himself back
in his capacious arm-chair.

“Gregson the upholsterer, sir, cannot meet the third instalment due
this day on his warrant-of-attorney for eight hundred pounds,” said
Mr. Green, referring to the diary; “but he called just now and told me
that if you would give him till next Monday——”

“Not an hour, Green,” interrupted Mr. Heathcote, imperiously. “Let

execution issue. He has enough property to satisfy the greater
portion—and, as his brother-in-law is his security, we shall slap at
him without delay for the residue. He is a toiling, striving man, and
will beat up amongst his friends to raise the necessary amount by
the time we have run him up some twenty pounds’ costs. What is
the next?”

“Sir Thomas Skeffington’s bill for five hundred pounds comes due to-
day, sir,” continued the head clerk; “and he proposes to renew it.”

“Let me see?” mused Mr. Heathcote. “It was originally two hundred
pounds that I lent this young spendthrift baronet; and he has
already renewed six times. Well—let him give another bill—for five
hundred and fifty, mind—don’t forget to tack on the fifty, Green. His
uncle will pay the debt eventually—it is all safe. Go on.”

“Thompson, sir, the defendant in Jones’s case, has let judgment go

by default,” continued Mr. Green: “he says that he would do anything
rather than run up expenses; and he has been here this morning to
beg and implore that time may be granted. His wife has just been
confined, and his eldest child is at the point of death. The debt is a
hundred and eleven pounds with costs—and he proposes to pay it at
five pounds a week.”

“No such thing!” exclaimed Mr. Heathcote, almost savagely. “Let him
go to prison! He will be writing imploring letters, and his father-in-
law will call to make terms. Those letters and visits, Green, will be
another six or seven pounds in my pocket: and then we will let him
out on his warrant-of-attorney to pay the five pounds a-week. It is
always better to send a man in his case to prison first, although you
mean all the time to accede to his proposal in the long run. He is an
industrious, enterprising fellow—and his father-in-law is a highly
respectable man. So he will not knock up for this little affair. Go on.”

“Beale’s wife called last evening, sir,” resumed Mr. Green, “and says
that her husband is lying in a sad state in the infirmary at
Whitecross-street prison. She and her children are starving—and she
begs you for the love of God to let her husband out. It is their only
chance; and he will pay you when he can.”
“When he can!” exclaimed Mr. Heathcote, in bitter contempt. “And
that will be never. I am surprised, Mr. Green, that you should have
bothered me with such a trifle, instead of telling the woman at once
that her husband may rot in gaol until he pays me every farthing.”

“I should not have thought of troubling you, sir, in the matter,”

observed the clerk, in a tone of servile contrition; “only the woman
did seem so very, very miserable—and she cried so bitterly—and she
had a young child that looked half-famished in her arms——”

“And you pitied her, I suppose?” interrupted Mr. Heathcote, in a tone

of cool irony. “You have been in my service for twelve years to some
purpose.”

“Pray forgive me, sir: but—but—I happen to know that Beale’s wife
and family are really starving,” said the clerk, whose heart was a
trifle less hardened than that of his master.

“Let them starve!” rejoined the latter, with an air of brutal

indifference. “Now, what have you next upon your list?”

“William Fox, the ironmonger, sir, has called a meeting of his

creditors,” resumed Mr. Green, now regretting that he should have
allowed himself to be carried away by a scintillation of humane
feeling so far as to merit a rebuke at Mr. Heathcote’s hands.

“Well—I know that,” observed the lawyer. “But I never attend

meetings of creditors—I never accept compositions, Mr. Green. But
has the fellow been here? and what does he say?”

“It appears, sir, that he laid a full and complete account of his affairs
before his creditors,” continued the clerk; “and that they were well
satisfied with the statement. He showed them that his
embarrassments arose from no fault of his own, but simply from the
failure of a large house in Birmingham.”

“And what did he offer?” demanded Mr. Heathcote.

“He asked for two years to pay off all his liabilities,” was the answer.
“He did not propose a composition, but will settle everything in full.
His brother has offered to become security for him.”

“Well, he must pay me at once—within twenty-four hours—or I shall

sign judgment, Green,” exclaimed the lawyer. “Or stop—it will be
better to sign judgment at once, and issue execution. I shall then,
get my money directly—and his other creditors may wait the two
years. If he calls again to-day, tell him that I am out—and mind and
have a seizure in his house by the evening.”

“It shall be done, sir,” said the head clerk: then, again referring to
the diary, he proceeded thus:—“You remember that affair of
Williamson, sir? He called and left seventy-two pounds the other
evening to take up his bill, which had been sent back; and as you
were out at the time, he could not have the bill delivered over to
him. I offered him a receipt for the money: but he left it without
taking any acknowledgment—saying, ‘Oh! I can trust to your
honour,’—or words to that effect. Well, sir, he has called two or three
times since for the bill——”

“Do the other clerks know that he paid the money?” demanded Mr.
Heathcote, fixing his keen eyes significantly upon Green.

“No, sir,” was the answer, accompanied by a look of intelligence

showing that the man comprehended his master’s meaning. “They
were all gone—and I was just on the point of leaving likewise when
Williamson called.”

“Then issue a writ this very day for the recovery of the amount,” said
the lawyer. “Of course, Green, you will know nothing at all about
having received the money from him?”

“Of course not, sir,” replied the clerk.

“And should he go to trial, you will swear that he never paid you?”
continued the lawyer, speaking with the imperious authority of a
man who knew that the other was in his power.

“It would not be the first time, sir, that I have perjured——”

“Well—well!” cried Mr. Heathcote, hastily; for though he did not mind
suborning his clerk to commit a crime, yet he did not like to have the
deed designated in plain terms and exhibited to his eyes in all its
dreadful nakedness and reality. “Let this be done, Green: and take a
guinea for yourself—charging it in the office-expenses of the week.
You are a faithful servant—and I am pleased with you,” he added, in
a patronising manner.

“I am truly grateful, sir, for your kindness and for your good opinion,”
said the clerk, with a low bow: but at the same time he was
compelled to stifle the sigh that rose to his very lips at the idea of
being so dependent upon his master, and so enthralled by
circumstances as to be compelled to submit to be made the tool—
the base instrument—the despicable agent of that master’s hidden
villany.

“Have you anything more in the diary?” demanded Mr. Heathcote.

“Nothing, sir,” responded the clerk: “unless it be that the two doctors
are to call to-day for the second halves of the reward promised them
for signing the certificate.”

“Good! pay them each immediately, the affair having been attended
with complete success,” said the lawyer: “and indeed, you may give
them each five guineas beyond the sum originally promised.”

“It shall be done, sir,” returned Mr. Green. “Have you any farther
commands?”

“I am at a loss how to proceed with respect to that woman,” said Mr.

Heathcote, his brows lowering in token of vexation, while at the
same time he ran his skinny fingers through his wiry hair.
“You mean Mrs. Sefton, sir?” said the clerk.

“Mrs. Sefton—as she calls herself,” observed Mr. Heathcote, with a

grim smile. “Ah! little thought Gilbert,” he continued in a musing, but
also triumphant tone, “that for years past I have known all and
everything connected with him! Little did he imagine that his liaison
—his amour with that lady was no secret to me, secure and safe as
he deemed it to be from all the world! But what am I do with regard
to her, Green?” he demanded, as he abruptly turned towards the
clerk, who stood like a menial in his presence.

“Your wisdom, sir, can doubtless suggest some plan,” was the
sycophantic reply. “Do you imagine that she is likely to be
dangerous?”

“She loves my brother, Green,” answered the lawyer: “she entertains

for him that passion which never has warmed my breast—and never
shall,” he continued, in a contemptuous tone. “Oh! how I hate the
very name of love! It is a sickly sentimentalism—a maudlin feeling,
which is derogatory to the character of a man of the world, but
which makes a woman dangerous indeed, when the object of her
passion is outraged or wronged. Yes, Green—I do fear this Mrs.
Sefton, as we will call her—since thus she chooses to denominate
herself: I do consider her to be dangerous—and I know that she is
of an intrepid, resolute character. She will leave no stone unturned
to have what she will call justice done towards my brother; and by
some means must I take from her the power of doing me an injury.”

“And those means, sir?” asked the clerk, timidly.

“I have thought of many plans, Green,” replied Mr. Heathcote: “but

not one appears to be sufficiently decisive to meet the exigencies of
the case. Could I only get her out of the country, or else have her
locked up in some place of security, for a few weeks, I should in that
interval have all my schemes so effectually carried out, as to be able
to defy not only that woman, but likewise all the world.”
“And is it so very difficult, sir, to encompass one or the other of the
two aims you have mentioned?” inquired Green.

“On what pretence can I imprison her?” demanded Mr. Heathcote,

impatiently. “But I might be able to induce her to quit the country,”
he added, in a more measured tone, and with a steadfast look at his
clerk—a look which seemed to say, “Can I trust you?”

“Is there any way, sir, wherein my humble services will avail?” asked
the man, thoroughly understanding the intent of that look.

“Yes—on you must I rely in this matter,” said the lawyer, after a few
minutes’ deep cogitation. “Mr. Green,” continued Heathcote, again
fixing on him his small, malignant, soul-reading eyes, “you will
excuse me for a moment if I recall the past to your recollection——”

“But why, sir—why!” exclaimed the clerk, his pale face suddenly
becoming paler still and his limbs trembling convulsively.

“Because I choose,” returned his master, brutally: “because it suits

my present purpose to remind you how much you are in my power.”

The wretched clerk moaned audibly, but uttered not another word.

“Twelve years ago, Mr. Green,” resumed Heathcote, with deep

emphasis and in a measured tone, as if he were determined that not
a syllable which he intended to say should be lost on the unhappy
man who was thus undergoing a painful—agonising infliction,
—“twelve years ago, Mr. Green, you were an attorney in practice for
yourself. An accident, the particulars of which it is not necessary for
me to recite, made me acquainted with a fact which placed you
entirely at my mercy. You and a gentleman named Clarence Villiers
had been left the joint guardians of a boy then a little more than
eight years old; and a thousand pounds were invested in the funds
in the name of yourself and the said Clarence Villiers. It had been
agreed that you should be the acting trustee. You wanted money—
you forged the name of Clarence Villiers to the necessary deed—and
you sold out the thousand pounds.”

The miserable clerk groaned again, more audibly than before: but
his master heeded not the intense agony his words inflicted.

“Yes—you sold out the money, and appropriated it to your purposes,”

continued the remorseless attorney. “The fact came to my
knowledge,—and I offered to save you, on condition that you should
serve me—that you should devote yourself to me, body and soul—
that you should see only with my eyes, hear only with my ears, and
use your hands and your intellectual powers as I directed. I required
a person of this description: I was looking out for such an one at the
moment when accident thus placed you in my power. We soon came
to terms. You gave up a business that was not worth retaining—and
you became my head clerk. I have paid you two guineas a week
with the most scrupulous regularity—and I have often made you
little presents, as even this very morning have I done. But what
more have I been generous enough to do for you? Why—I have
regularly paid the interest of the thousand pounds for you, as if it
were still in the Bank of England; and your ward suspects not that
his capital is gone. Neither does your co-trustee Clarence Villiers
suspect it, Mr. Green,” added Heathcote, emphatically. “But in six
weeks’ time, the youth will have completed his twenty-first year; and
he will apply to Mr. Villiers and yourself for his thousand pounds. Mr.
Villiers will ask to accompany you to the Bank to make over the
money in due form—for Mr. Villiers is an honourable man. But the
money will not be there—unless I replace it for you, and thus save
you from transportation for life!”

“And you have promised that you will replace it, kind sir—you have
undertaken to save me from exposure, degradation, and
punishment!” exclaimed the clerk, his voice and manner becoming
almost wild in the earnestness of their appeal.
“Yes—and I will keep my word, Green,” responded Heathcote. “If I
have now recapitulated circumstances which are necessarily so
indelibly stamped upon your memory, it was merely to convince you
that I have it in my power to save you from a terrible fate—or to
crush you as I would a viper beneath my heel. We shall not be the
worse friends because we understand our relative positions; and
mark me—never, never would I place myself in the power of a man
unless he were ten thousand times more entangled in my meshes
than I could possibly be in his.”

“Surely—surely, sir, you do not suspect my fidelity?” said the clerk,

the workings of whose pale countenance were dreadful to behold;
“surely you do not think that I should be ungrateful or mad enough
to breathe a word to your prejudice? If you have done much for me,
sir, I have served you faithfully; and this I can assert without fear of
contradiction. I am ever at your disposal—ever in readiness to obey
your commands, without questioning their propriety.”

“All this I know, my friend,” said Heathcote, his brows now elevating
themselves with triumph; for he saw that the trembling wretch
before him was docile, pliant, and obedient as a deaf and dumb
slave following the signals made by an oriental despot: “all this I
know,” repeated the lawyer;—“but there is no harm in occasionally
setting forth the grounds on which our connexion is based. This
being accomplished in the present instance, we may at once revert
to the business that we have now in hand.”

“Relative to Mrs. Sefton, sir?” remarked Green, anxious to convince

his master that he was mindful of the grave and important interests
now involved in connexion with that lady’s name.

“Yes—relative to Mrs. Sefton,” said Heathcote. “I have already

observed that there are only two ways of dealing with her: either to
lock her up in a place of security for a time, or to get her out of the
country. The latter alternative must be adopted; and it is for you to
play a part which, if ingeniously enacted, cannot fail of success.”
Mr. Green placed himself in an attitude of deep attention—for all this
while, as the reader will observe, he had remained standing, his
master never desiring him to be seated, however long their
conference might last.

“The impatience of this Mrs. Sefton is doubtless growing intolerable,”

continued the lawyer: “a week has now passed since Sir Gilbert
disappeared—and she will speedily initiate active measures to
discover what has become of him. There is not therefore another
moment to lose;—and her own affection shall be made the means of
which we will avail ourselves in order to baffle and defeat her. Do
you repair at once to Kentish Town and seek an interview with her.
She does not know you—she never saw you: she will suspect
nothing—but believe everything. You will tell her that you have just
arrived from Liverpool—that you are an intimate friend of Sir Gilbert
—and that he has embarked for America, in consequence of serious
pecuniary embarrassments. You must assure her that those
embarrassments came on him so suddenly, menacing his person
with arrest—and that he was so bewildered and excited by the
danger and disgrace which thus threatened him, that he fled without
having time to communicate even with her. You will then go on to
say that he sent you up to London to break these news to her—to
supply her with money—and to implore her to hasten after Sir
Gilbert, whom she will join at New York. All this must you tell her;—
and if you play your part properly, it is, as I have already observed,
certain to experience success.”

“You may rely upon me, sir,” said the clerk.

“All your presence of mind—all your readiness of invention—all your

impudence, will be requisite in the matter,” continued Heathcote:
“for Mrs. Sefton is an intelligent woman—and the least hesitation in
giving a reply to any of her questions, will assuredly awaken her
suspicions, and spoil all. But if you be wary and cautious, you must
come off triumphant. Believing that her connexion with Sir Gilbert is
a profound secret, she will at once receive you as a friend of her
lover’s, from the mere fact of your knowledge of their liaison:
because she will suppose that you could not have become aware of
it, unless he had in reality made you his confident. Then, again, the
circumstance of your being the bearer of fifty guineas—which I will
presently give you—as the means to defray the expenses of her
voyage to New York, will confirm all you have stated and give a
complete colouring to all your representations. Do you thoroughly
understand me, Green?—and do you consider yourself competent to
undertake this mission?—for I can assure you that it is of the highest
importance for me to remove that dangerous woman from England
for a few weeks.”

“I do not hesitate to charge myself with the enterprise, sir,” said

Green, meekly,—“delicate though its management may be;—and,
should it fail, it will be through no fault on my part.”

“Then it will not fail, sir!” cried Mr. Heathcote, emphatically. “And
now I will give you the money necessary for your purpose—and you
must accompany the lady to Liverpool, remember. If a packet be not
about to start immediately, then lodge her at an hotel, alleging that
you are an unmarried man as an apology for not inviting her to stay
at your own house until her departure. You can put up at another
hotel. But all these minor details I leave to your judgment and
discretion.”

Mr. Heathcote now placed a quantity of notes and some gold in the
hands of his clerk, who forthwith took leave of his wily master: ere
he departed, however, he stopped in the outer office to issue
instructions relative to the various matters entered in the diary. At
length he was ready to issue forth on the mission entrusted to him;
but at that moment a cab stopped at the door, and a tall, handsome,
well-dressed gentleman alighted.

Entering the clerk’s office, the visitor inquired if Mr. Heathcote was at
home.
“What name shall I say, sir?” asked Green.

“That is of no consequence,” was the hasty reply: “my business is of

great importance.”

“Walk in, then, if you please, sir,” said Green: and, having shown the
visitor into the lawyer’s private apartment, the head clerk was at
length enabled to hurry away to his own lodgings, in order to make
some change in his toilette ere he proceeded to Kentish Town.
 CHAPTER CLXVIII.
THE NOBLEMAN AND THE LAWYER.

On entering into the presence of Mr. Heathcote, the handsome

visitor tendered his card; and the moment the lawyer cast his eyes
upon it, a cloud passed hastily over his countenance—for he knew
that Lord William Trevelyan, whose name appeared on that card,
was an intimate friend of Sir Gilbert. He however composed himself
in an instant, and, pointing to a chair, said, “Be seated, my lord.”

The young nobleman accepted the invitation, and then observed, “I

have to apologise for intruding myself upon you——”

“Not if you come on matters of business, my lord,” interrupted the

lawyer, in a tone which was intended to imply that his time was
nevertheless very precious.

“I fear that you will scarcely consider my visit to be connected with

business in the sense you would have me infer,” said Trevelyan,
courteously: “at the same time, you will give me credit for the best
intentions——”

“Pray, my lord, come to the point,” exclaimed Heathcote, impatiently.

“I have a vast amount of work upon my hands—several
appointments to keep—and my toilette not yet performed.”

“In one word, sir,” said Trevelyan, “may I inquire if you have received
any tidings concerning your brother, who is a dear and valued friend
of mine?”

“I have heard that my brother is absent, my lord,” answered

Heathcote, coldly: “but I have no control over his movements—and
he is not in the habit of consulting me respecting his actions.”

“At the same time, sir——”

“Pardon me, my lord: I have answered you—and I have not a

moment to spare.”

“But as your brother’s friend, sir—his intimate friend——”

“I do not know you, my lord: neither do I trouble myself with my

brother’s friendships.”

These last words were uttered so rudely—almost brutally, that the

young nobleman’s countenance became the colour of scarlet, and he
felt that were the lawyer a man less advanced in years, he would
have knocked him down for his insolence.

“I am aware, sir,” he said, subduing his indignation as well as he was

able, “that I have no claim upon your courtesy, beyond that which
social conventions establish: but I regret to find that you should
think it necessary to treat with such extreme incivility a person who
has never offended you.”

“Then wherefore does your lordship force yourself into my presence,

and persist in remaining here, when I tell you that I am occupied
with serious matters?” demanded the lawyer, rising from his seat,
while his brows were bent in such a way as to render his
countenance particularly displeasing and sinister at that moment.

“Serious matters, indeed!” ejaculated Lord William, also rising; “is it

not a serious matter that your brother—your own brother—has
suddenly disappeared——”
“I have already told your lordship that I have no control over the
actions of Sir Gilbert Heathcote,” said the lawyer; “and I am not to
be forced into a discussion on any subject with one who is a
complete stranger to me.”

“I repeat, sir, that I am your brother’s intimate friend,” cried the

young patrician, indignantly.

“But I repeat, on my side, that you are no friend of mine—nor likely

to be,” responded Heathcote. “Will your lordship, therefore, leave me
to those pursuits which have better claims upon my time and
attention?”

“Better claims! And yet you must surely have some of the ordinary
feelings of human nature,” urged the nobleman, in a tone of mingled
remonstrance and earnest appeal. “One word more, if you please,
sir,” he continued, seeing that Heathcote was again about to
interrupt him: “this matter is becoming serious! For eight days has
your brother been missed from his place of abode and from the
circle of his friends: an investigation into so mysterious an
occurrence must necessarily take place—and without delay, too.
What will the world think of you, sir—you, the nearest living relative
of one who may perhaps be no more—if you refuse your co-
operation in this endeavour to ascertain what has become of him? I
will even go farther, sir, and declare that a certain degree of odium
will attach itself to you——”

“Young man, by what right do you thus insult me?” demanded the
lawyer, completely unabashed, and measuring Lord William
Trevelyan from head to foot with his keen, searching eyes. “Do you
for a single instant dare to assert that if my brother should have met
with foul play—as your words just now implied such a suspicion,—do
you dare to assert, I ask, that the world would couple the slightest
imputation with my good name? Though not of an aristocratic rank,
my social position is an honourable one; and such as it is, my own
talents—my own energies—my own hard toils, have made it. But
because I can see nothing extraordinary in the absence of a man
who has no domestic ties to bind him to one place, and who, acting
upon a sudden caprice or fancy, may choose to depart from the
metropolis, perhaps,—because I behold nothing remarkable in all
this, am I to be reproached, vituperated, and even insulted by you,
who adopt another view of the matter? Why, my lord, you are far
more intimate with Sir Gilbert Heathcote than I, even though he is
my brother;—and what would you say, were I to repair to your
house—force myself into your presence—refuse to leave when
solicited—and actually level the most injurious language, amounting
almost to positive imputations, at your head? I appeal to your good
sense, if you possess any, to consider the impropriety of your
conduct here this morning, and to take your departure at once,
before you irritate me more deeply than you have already done.”

“I have listened, sir, with respectful attention to all you have said,”
returned Lord William Trevelyan; “and I declare emphatically that I
am not satisfied with your reasoning. I impute nothing to you—
because I know not what suspicions to entertain in the case. I
frankly confess that I am bewildered, not only by the fact of my
friend’s unaccountable disappearance, but also by the manner in
which you treat that circumstance. You declare that you cannot bring
yourself to look seriously on this disappearance: surely it ought to
alarm you, when I, who am so well acquainted with your brother,
solemnly aver that I have particular reasons for knowing that he
would not leave the metropolis in obedience to any sudden fancy or
whim, without previously making a communication in a certain
quarter.”

“To you, I presume?” said Heathcote, fixing his eyes searchingly

upon the patrician.

“No—not to myself,” was the reply: “but to another.”

“And that other?” observed the lawyer interrogatively: for he now

began to fear that Trevelyan alluded to Mrs. Sefton, in which case he
might repair straight to her abode after quitting that office—he
might there meet the clerk whom he had seen on his arrival just
now—and he might mar the entire scheme that had been concocted
for the purpose of inducing the lady to leave England.

“Unless you yourself are acquainted with that other person to whom
I alluded—or at least have some knowledge to whom I could so
allude—I am not at liberty to make any revelations,” observed Lord
William.

“Oh! this is admirable!” ejaculated the lawyer, reseating himself and

appearing no longer in a hurry to break off the conference: for he
now perceived the necessity of detaining the nobleman as long as
possible, so as to afford Green ample time to carry the deeply-
concocted scheme into effect.

“You are pleased to be jocular at something, sir,” said Trevelyan,

biting his lip with vexation at an insolence which he could not
chastise: and leaning against the mantel-piece, he surveyed the
attorney with mingled anger and aversion.

“Yes—I am jocular,” exclaimed the latter; “and I again declare that

your conduct is admirable! You come to me to aid you in
investigating what you are pleased to denominate a most mysterious
occurrence; and, by way of inducing me thus to co-operate, you
yourself start fresh mysteries, and make enigmatic allusions to
unintelligible matters, concerning which you refuse to enter into any
explanations.”

“There may be certain circumstances, sir, which a man of honour

dares not reveal,” said Lord William, sternly; “and such is the case in
the present instance.”

“You have therefore a positive proof that Sir Gilbert’s friends were
more in his confidence than his own brother,” replied the lawyer, in a
sarcastic tone; “and this is tantamount to what I told you just now.”
“Yes, sir—but the circumstances to which I allude have no reference
to the mysterious disappearance of Sir Gilbert Heathcote,” rejoined
Trevelyan; “nor do they in any way relieve you from your
responsibility as a brother.”

“But, since you yourself are acquainted with some mysterious and
unmentionable circumstances connected with my brother,” said the
lawyer, still in a tone of bitter sarcasm, “I have much more reason to
accuse you of possessing a clue to the causes of his disappearance,
than you have to level the same charge at me. Now, from your
words—for I am a man of the world, my lord—I naturally infer that
the other person to whom you so emphatically alluded, must be a
lady——”

“I did not say so, sir—I gave you no reason for entertaining such an
opinion,” exclaimed Trevelyan fearful of now compromising a matter
of great delicacy.

“But I choose to think so,” said the lawyer, elevating his brows to an
extraordinary degree, while a malignant light gleamed in his restless
eyes: “and is it strange—is it unusual in the world, for a man to
absent himself suddenly and even mysteriously, in order to break off
a connexion of which he is wearied, and which no longer has any
charms for him?”

“One word, sir,” interjected Trevelyan, annoyed with himself for

having made any allusion to his friend’s connexion with Mrs. Sefton:
“your brother has undertaken no sudden journey—of that I am well
assured. Would he quit his residence without leaving even a
message behind him? Would he depart without even so much as a
change of raiment—without the necessaries of the toilette?”

“Pooh! pooh!” ejaculated the lawyer, now throwing an expression of

sovereign contempt into his tone. “A man with money can purchase
a carpetbag or a portmanteau at the first town he stops at, and can
stock it well, too, with linen and hairbrushes for a few shillings.
Really, my lord, you compel me to treat you as an inexperienced
child, who, having got some wild or romantic notion into his head, is
determined to maintain it by any argument, no matter how
preposterous or far-fetched.”

Trevelyan bit his lip again: for he saw that the lawyer had really the
advantage of him now; and he more than ever blamed his own
indiscretion in having alluded to the affair of Mrs. Sefton.

“Come, my lord, be reasonable,” proceeded Heathcote, in a

conciliatory tone; “and I will pardon you the rudeness—or I will
rather call it the brusquerie, of your first proceedings with regard to
me. You cannot deny that there is a lady in the case: I am far-
sighted enough to have made that discovery. Well, my brother is
tired of her, or has quarrelled with her—or something of that sort;
and he has therefore taken a sudden trip, heaven only knows where.
Do you really imagine that if I had any serious fears, I would refuse
to co-operate with you in instituting the necessary inquiries? Depend
upon it, Sir Gilbert will re-appear again shortly amongst his friends;
and he would not be over-well pleased if he found on his return, or if
the newspapers wafted to him the fact, that a terrible hubbub had
taken place in consequence of his sudden departure. I am a much
older man than you, my lord,—and I look at these matters more
calmly—more deliberately.”

Trevelyan knew not how to reply to these observations. Though they

did not dissipate the alarm which he experienced at the absence of
Sir Gilbert, yet he began to think that the lawyer was really sincere
in giving utterance to them. He, on one side, was disposed to view
the affair seriously: Heathcote, on the other, put his own
interpretation on it;—and, in the same way that Trevelyan could not
resist the impressions made upon himself, he felt bound to allow the
merit of equal conscientiousness on the part of the attorney.

At all events, there was no utility in protracting the discourse; and

the young nobleman accordingly resolved to take his leave,
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