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of adherence to contractual terms, and the reasonableness of the
income and residual value projections. See also Helba v.
Commissioner, 87 T.C. 983, 1005-1011 (1986), affd. without
published opinion 860 F.2d 1075 (3d Cir. 1988).
Levy concerned a sale and leaseback of computer equipment;
the present case concerns the financial arrangements purporting
to undergird an employee leasing program. Although the
relationship of sales price to fair market value and questions of
residual value are not relevant to our inquiry, the other factors
provide a useful framework for evaluating the employee leasing
and financial agreements at issue.
a. Structure of the Financing
The structure of the financing is the most important factor
in evaluating the claimed economic substance of the employee
leasing arrangements.
The true nature of the financing was straightforward. There
were two types of transaction that occurred in cash, and, in the
context of this case, had economic substance. The first was the
partners' investment of cash in tax shelters. BBPA and Machise
divided this cash between themselves.33 The second type of
33Petitioners do not contend that the investors may deduct
this cash itself. We note that a taxpayer is not entitled to
deduct out-of-pocket cash losses under sec. 165(c)(2) arising
from a tax shelter that lacks economic substance. Mahoney v.
Commissioner, 808 F.2d 1219, 1220 (6th Cir. 1987), affg. Forseth
v. Commissioner, 85 T.C. 127 (1985); Hoffpauir v. Commissioner,
T.C. Memo. 1996-41.
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