Carl J.D. Bauman and Margaret A. Bauman - Page 23

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          satisfy its royalty obligations and generate a profit.  We agree.           
          Neither the testimony at trial nor the unreliable Coal Reserve              
          Report persuades us that ERL intended to generate sufficient                
          revenue to meet its royalty obligations and earn profits.                   
               Petitioners assert that the lease between ERL and JAD was              
          negotiated at arm’s length and that the notes representing ERL’s            
          minimum royalty obligations were of a type commonly used in                 
          business.  Essentially, petitioners attribute the structure of              
          the ERL’s lease agreement to the financial wizardry of McIntyre.            
          We are not persuaded by petitioners’ argument.  The entire                  
          transaction is covered by a blanket of suspicion.  The terms of             
          the lease agreement, in effect, permit ERL to postpone payment on           
          each note for 30 years.  Moreover, no partner, limited or                   
          general, was personally liable for the interest payable on such             
          notes.   Additionally, except for the first three notes, all                
          notes representing ERL’s obligations were to be nonrecourse.                
          Nonrecourse financing is a common indicator of a sham                       
          transaction.  Sacks v. Commissioner, supra; Ferrell v.                      
          Commissioner, 90 T.C. 1154 (1988).  Such notes are not the type             
          of obligations commonly used in commerce or by banks and other              
          financial institutions.  See Rose v. Commissioner, supra at                 
               The Court is not convinced that the notes were bona fide               
          debt instruments.  Although petitioners claim that a letter from            
          JAD to Bauman which notified Bauman of ERL’s default constitutes            

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