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six Sentinel expanded polyethylene (EPE) recyclers to ECI Corp.
for $5,886,000 ($981,000 each). ECI Corp., in turn, resold the
recyclers to F & G Corp. for $6,976,000 ($1,162,666 each). F & G
Corp. then leased the recyclers to Clearwater, which licensed the
recyclers to FMEC Corp., which sublicensed them back to PI. All
of the monthly payments required among the entities in the above
transactions offset each other. These transactions were done
simultaneously. We refer to these transactions collectively as
the Clearwater transaction. The fair market value of a Sentinel
EPE recycler in 1981 was not in excess of $50,000.
PI allegedly sublicensed the recyclers to entities that
would use them to recycle plastic scrap. The sublicense
agreements provided that the end-users would transfer to PI 100
percent of the recycled scrap in exchange for a payment from FMEC
based on the quality and amount of recycled scrap.
In 1981, petitioner acquired a 3.194-percent limited
partnership interest in EI, and EI acquired a 43.313-percent
limited partnership interest in Clearwater. As a result of
passthrough from Clearwater and EI, on his 1981 Federal income
tax return petitioner deducted an operating loss in the amount of
$8,945 and claimed a business energy credit in the amount of
$9,651.4 Respondent disallowed petitioner's claimed operating
4
On his 1981 Federal income tax return, petitioner did not
include the purported value of the Clearwater recyclers in his
claimed qualified investment for purposes of the investment tax
(continued...)
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