- 39 -
concluded that no addition to tax under section 6661 should be
imposed. We did not in Waters consider whether the transaction
constituted a tax shelter. Respondent has made that claim here,
and so we must make certain preliminary determinations before
getting to the question of substantial authority.
We find that both activities constitute tax shelters within
the meaning of section 6661(b)(2)(C)(ii). We are aware that
respondent has stipulated that neither activity was a sham, that
petitioner had a business purpose in entering each, that
petitioner's investments had substance, and that he acquired the
benefits and burdens of ownership. We have taken similar
stipulations into account in finding that a leasing transaction
was not a tax shelter. Martuccio v. Commissioner, T.C. Memo.
1992-311, revd. on other grounds 30 F.3d 743 (6th Cir. 1994);
Epsten v. Commissioner, T.C. Memo. 1991-252. Nevertheless, we
believe that here the principal purpose of both activities was
the avoidance of Federal income tax. Both activities produced
substantial tax losses for the years in question. Both involved
nonrecourse financing. The circular flow of matching payments,
combined with the nonrecourse nature of the underlying debt,
meant that any personal liability of petitioner's on the
installment notes was at best contingent and theoretical during
the years in issue. Petitioner enjoyed indemnities and deferral
provisions. If petitioner bore any risk at all with respect to
either installment note, it could only have ripened into a
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