Barry B. Bealor and Nancy L. Bealor, et al. - Page 20

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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               
                                                             (continued...)           




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