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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
419-421.
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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