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payments were deemed distributed to the partners. The partners,
in turn, were credited with making payments in these amounts on
their original loans from Machise--or from Machise through
Qulart.
These elaborate arrangements among Machise, Qulart, BBPA,
the partners, and the partnerships existed in form only. They
were examples of the classic circle transactions that lack
economic reality, to which we have refused to give effect.
For example, in Drobny v. Commissioner, 86 T.C. 1326 (1986),
the taxpayers contributed cash and the proceeds of short-term
loans to research-and-development tax shelters. Some $900,000 of
these amounts--allegedly deductible research and development
costs--were distributed to the bank account of a corporation
known as "Isle". On December 27, 1979, the amounts were then
advanced to subcontractor corporations called FAL and ARL. The
promoters of the tax shelters then used the funds to purchase
commercial debt instruments. When, 2 weeks into the new year,
these instruments matured, the proceeds were repaid to the
taxpayers. This Court said: "The transactions surrounding the
circular flow of the $900,000 proceeds of the bank loans had no
substance for tax purposes". Id. at 1346. The taxpayers in that
case had contended that the ARL and FAL corporations could have
broken the circle and prevented the taxpayers from receiving
their repayments. That would have been an event of economic
substance. We disagreed with the taxpayers' argument, however,
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