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substantive transaction was the payment of Machise’s cash to the
employees and independent contractors who were its service
providers. These payments took the form of checks signed by
Machise's principals, drawn upon an account funded by Machise,
but maintained in the name of the partnership.
Petitioners contend that the transactions were much more
complicated. And, as Fred designed them, they were very
complicated indeed. In general terms, petitioners claim that
Machise lent millions of dollars to the partners. The partners
then invested this money in the partnerships, which in turn
circled this money, as an "advance", back to Machise. For the
first half of the calendar year, Machise again advanced this
money, in weekly amounts, to the partnerships. The partnerships
then used this borrowed money to meet Machise's payroll costs.
During the second half of the calendar year, the partnerships
allegedly reimbursed Machise for the advances and continued to
meet Machise's payroll costs. Because the partnerships had no
income of their own for the years they made these payments, they
claimed losses, which their partners deducted on their own
returns.
In subsequent years, this investment circle was reversed.
Once again, no cash changed hands. The claimed payments took the
form only of notes or bookkeeping entries. Machise thus
allegedly made payments to the partnerships as its compensation
fee and an additional annual late charge. The amounts of these
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