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3. Also on the same day, Associates drew a check
on account No. 13022 made payable to the Associates
Trust account, No. 13030. It is deposited into that
account.
The client claimed a deduction of the $30,000 prepaid
interest on his 1971 Federal income tax return. The promoter was
convicted for assisting in the preparation of a false tax return.
The promoter argued on appeal that the interest deductions were
lawful and that the evidence was insufficient to sustain a
conviction. The Court of Appeals disagreed and affirmed the
conviction. It stated: "The most important aspect of the
operations here performed is that there was no substance behind
the forms employed." Id. at 1152. It found the promoter's
arguments to be "without any merit." Id. at 1153.
The investment circles in the cases before us share
important similarities with Drobny, Karme, and Clardy. Like
those cases, the cases before us employed circular obligations
with no economic effect. Fred, as the promoter, designed and
controlled the programs so that they would be isolated from
commercial reality. They generated substantial tax benefits,
with no events of economic substance. As in Drobny, Karme and
Clardy, the circular transactions before us cannot sustain the
tax deductions claimed by petitioners.34
34These considerations apply to all the partnership losses
at issue. For the years 1982 through 1986, a substantial portion
of the partnerships' first-year losses consisted of "professional
and management fees". These were the management fees paid to
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