5
taken by Lone Star should be disallowed. Respondent determined
deficiencies as to Heller and Murphy for the taxable year 1989 on
the theory that Lone Star recognized income when it was released
from a debt obligation.
A. Background
In 1983, Murphy represented Micro-Bio (Ireland) Ltd. (Micro-
Bio), a corporation formed under the laws of Ireland, in the
acquisition of a chlor-alkali system, a system which produces
chlorine. Murphy traveled to Arizona with Micro-Bio executives
to see a chlor-alkali system in use. Micro-Bio executives liked
what they saw and decided to purchase a chlor-alkali system from
Eltech, Ltd. (Eltech), the manufacturer of the chlor-alkali
system.
On August 8, 1983, Micro-Bio entered into a letter agreement
with Eltech in which Micro-Bio agreed to purchase the chlor-
alkali system. The relevant terms of the letter agreement
include the following: (1) A lease period of 5 years with
interest calculated on the complete contract amount from the
shipment date of the equipment; (2) payments were to commence 30
days after plant startup and were to continue for 59 consecutive
months; (3) the equipment passed to Micro-Bio after the 5-year
lease period; (4) the equipment remained the property of Eltech
at all times throughout the 5-year lease period; (5) Micro-Bio
had the option to obtain a third-party lease or financing subject
to Eltech's approval; (6) Micro-Bio would insure the equipment;
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