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consulting various professionals and that such investment was
undertaken with the intent of making a profit. Accordingly,
petitioners conclude, such consultation and reliance preclude a
finding that they were negligent.
Respondent rejects petitioners’ arguments as self-serving
and contends that the sole purpose underlying ERL’s formation was
to enable the limited partners to claim tax benefits based on the
pass-through of enormous losses. As a result, respondent
maintains, ERL’s lease transaction was devoid of economic
substance and, as such, must be disregarded for Federal income
tax purposes. Respondent further maintains that ERL was not
engaged in an activity for profit and that petitioners have
failed to substantiate various ERL deductions. Respondent also
maintains that certain additions to tax are appropriate for each
year at issue.
Issues 1 & 2. Economic Substance & Bona Fide Indebtedness
Numerous cases hold that transactions which are devoid of
economic substance are to be disregarded for Federal tax
purposes. See Larsen v. United States, 89 T.C. 1229, 1252
(1987), affd. in part and revd. in part sub nom.; Casebeer v.
Commissioner, 909 F.2d 1360 (9th Cir. 1990); Rose v.
Commissioner, 88 T.C. 386, 410 (1987), affd. 868 F.2d 851 (6th
Cir. 1989). In James v. Commissioner, 87 T.C. 905, 918 (1986),
affd. 899 F.2d 905 (10th Cir. 1990), we summarized the holdings
of such cases and explained that a transaction will not be
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