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However, Tandrill paid Mr. Illingworth’s company, Manhattan Metals,
$10,000 (denominated as a retainer and organization fee) upon the
signing of the Management Agreement. Thus, in essence, Mr.
Illingworth’s net contribution was approximately $10,000.
In addition, in 1980 Manhattan Metals received a $50,000
management fee (and $25,000 annually thereafter), plus an incentive
payment that would be triggered if the net assets of Tandrill
increased beyond a stipulated annual percentage threshold.
Manhattan Metals also had the right to share in the brokerage
commissions and other fees Tandrill paid.
Petitioner’s $300,000 investment was a fraction of the tax
benefits that Tandrill’s transactions were expected to provide.
Petitioners’ total deficiencies of $986,305 for 1976 and 1980
(arising from the disallowance of Tandrill’s losses) represent a
claimed tax benefit of more than three times his investment in
Tandrill. We believe that petitioner agreed to the arrangement with
Mr. Illingworth and Manhattan Metals because tax savings, rather
than Tandrill’s economic performance, was petitioner’s primary
objective.
Petitioner was a prototypical “passive investor”. He did not
have a meaningful role in Tandrill’s management. Tandrill only
engaged in trading activities, and these activities were delegated
to Manhattan Metals (and hence effectively to Mr. Illingworth) by
means of the Management Agreement. Petitioner testified that he did
not understand Tandrill’s trading activities. Although he claims to
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