- 5 -
for his investment of $25,000. As a result of the passthrough
from Hyannis, petitioners deducted on their 1981 Federal income
tax return an operating loss in the amount of $20,326 and claimed
investment tax and business energy credits totaling $39,604. The
underlying deficiency in this case results from respondent's
disallowance of petitioners' claimed operating loss and credits
related to Hyannis for 1981.
The underlying transaction in this case was found by this
Court to be the initial Plastics Recycling transaction in
Provizer v. Commissioner, supra, and may be summarized as
follows. In 1981, Packaging Industries, Inc. (PI), manufactured
and sold six Sentinel expanded polyethylene (EPE) recyclers to
ECI Corp. for $5,400,000 ($900,000 each), of which $340,000 was
to be paid in cash. ECI Corp., in turn, resold the recyclers to
the Hyannis limited partnership for $6,400,000 ($1,066,666 each),
of which $440,000 was paid in cash. Hyannis then leased the
recyclers to FMEC, which subleased them back to PI. All of the
monthly payments for nonrecourse notes, leases, and licenses,
which were required among the entities in the above transactions,
offset each other. These transactions were accomplished
simultaneously.
After the Hyannis offering closed, the safe-harbor leasing
rules were enacted as part of the Economic Recovery Tax Act of
1981 (ERTA), Pub. L. 97-34, 95 Stat. 172. The underlying
transaction was restructured in a manner designed to take
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