- 101 -
from their gross income under section 954(b)(4) until they filed
their amended petitions in these cases less than three months
prior to trial. It appears that, at least prior thereto, peti-
tioners themselves had reason to believe that that income was not
excludible from their gross income under section 954(b)(4) for
their taxable years ended December 25, 1983, through December 28,
1986.
With respect to B&L Hong Kong's interest income at issue,
petitioners do not point to any evidence to support a finding
that reducing taxes was not a significant purpose for effecting
the transactions that gave rise to that interest income.44 Al-
though petitioners argue on brief that B&L Hong Kong had interest
income from investments of its working capital, it is not clear
from the record what transactions gave rise to the interest
income at issue. On the record before us, we find that peti-
tioners failed to prove that respondent abused her discretion by
failing to conclude that reducing taxes was not a significant
purpose for effecting the transactions that gave rise to B&L Hong
44 On brief, respondent argues that the issue whether B&L Hong
Kong's interest income is excludible under sec. 954(b)(4) is not
a proper issue because it was not raised in the pleadings.
Respondent is wrong. Petitioners amended their petition to
assert that B&L Hong Kong's income from the sale of B&L products
it did not assemble and from "other revenues" was excludible
under sec. 954(b)(4).
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