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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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