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In Provizer v. Commissioner, supra, we examined the
Clearwater transaction. In the Clearwater transaction, PI sold
six EPE recyclers to ECI Corp. for $981,000 each, which in turn
resold the recyclers to F & G Corp. for $1,162,666 each. F & G
leased the recyclers to a limited partnership, Clearwater, which
licensed them to FMEC, which sublicensed them to PI. The
transaction involved herein differs in two respects: (1) Seven
Sentinel EPE recyclers were sold and leased rather than six; and
(2) Northeast, rather than Clearwater, leased the recyclers from
F & G and then licensed them to FMEC. Northeast is thus like
Clearwater, occupying the same link in the transactional chain.
In addition, the Sentinel EPE recyclers considered in this case
are the same type of machines considered in the Provizer case.
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
Corp. based on the quality and amount of recycled scrap.
In 1981, petitioner acquired a 3.908-percent limited
partnership interest in Northeast in exchange for his investment
of $37,500. As a result of the passthrough from Northeast,
petitioners deducted on their 1981 Federal income tax return an
operating loss in the amount of $30,510 and claimed investment
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