Carl J.D. Bauman and Margaret A. Bauman - Page 24

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          evidence of the bona fide nature of the notes, we find                      
          petitioners’ argument to be unpersuasive.  That a note is labeled           
          “recourse” is not itself dispositive; substance, not form, must             
          govern.  Gregory v. Helvering, 293 U.S. 465 (1935); Zmuda v.                
          Commissioner, 731 F.2d 1417 (9th Cir. 1984), affg. 79 T.C. 714              
          (1982).  A nonrecourse debt may be disregarded for tax purposes             
          where it appears likely from all the facts and circumstances that           
          the obligation will not be paid.  Waddell v. Commissioner, 86               
          T.C. 848, 902 (1986), affd. per curiam on other issues 841 F.2d             
          264 (9th Cir. 1988).  Even a recourse debt may not be recognized            
          if its payment is unlikely or too contingent.  Id.  The three               
          recourse notes at issue have a “strong nonrecourse flavor”, and,            
          because the record fails to establish that payment of any note,             
          recourse or nonrecourse, was reasonably likely, we are not                  
          convinced that such notes represented bona fide indebtedness.               
               In sum, petitioners have not sustained their burden of                 
          establishing that ERL’s activities were motivated by anything               
          other than a desire to obtain the related tax benefits.  See Karr           
          v. Commissioner, 924 F.2d 1018, 1023 (11th Cir. 1991), affg.                
          Smith v. Commissioner, 91 T.C. 733 (1988).  The nature of the               
          offering materials, the manner in which the partnership’s                   
          activities were actually conducted, and the illusory nature of              
          the lease agreement’s financing convince us that ERL’s lease with           
          JAD was devoid of economic substance.  Consequently, having                 

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