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b. Termination Agreements
Petitioners contend that the employee leasing arrangements
were valid commercial transactions because, ultimately, Machise
would have to pay the partnerships more in "overrides" than they
had invested. Indeed, the passage of time increased the apparent
prospect that Machise would have to make actual cash payments on
its obligations. This development would have been consistent
with economic substance, but it was not a happy prospect for the
participants. The offsetting paper transactions would no longer
suffice to cancel each other out. Machise would ultimately owe
more, in terms of the compensation fees, than it had borrowed.
As for the partners, if Machise encountered financial
difficulties, they might be required to make good on their notes
to Machise by paying Machise's creditors, without having received
any offsetting revenue from Machise.
When it appeared that there might be actual enforcement of
these notes or other adverse economic and tax effects, Fred
intervened with a fix. He came up with the termination
agreements, which he designed and entered into on behalf of the
parties so that everything would "zero out". He signed the
34(...continued)
Intercoastal or MITA in amounts ranging from $363,000 to
$400,000, and/or professional fees paid to BBPA ranging between
$14,300 to $45,525. As was the case with the partnerships'
obligations to Machise and Qulart, these payments consisted of
money circles or offsets. They had no economic substance, and no
tax effect.
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