- 133 -
guaranteed that the partners would never have a chance to earn a
return on their investments.
Fred's actions are inconsistent with his claims that the
partnerships had a profit objective. His deliberate postponement
of profits, and his interposition of the termination agreements,
show the absence of a profit objective.
It appears that changes in the tax law forced Fred's hand.
Fred interpreted the Tax Reform Act of 1986 as requiring the
partnerships to accrue currently and report the large amounts of
phantom income that Fred's paper transactions had generated. In
his view, the legislation thus created the likelihood that the
partners would be required to pay taxes on income that they would
never receive. The employee leasing schemes were thus no longer
workable, and Fred had to terminate them.
Even if the Tax Reform Act of 1986 had not been enacted, we
are convinced that Fred would have been required to come up with
termination agreements, or something like them. As discussed
supra pp. 122-126, there was no reasonable basis upon which to
project profitable operations. Without the termination
agreements (or their equivalents), the time would come when
Machise would have to pay its debts. Beginning in 1991, Machise
would be required to pay not only its current payroll costs, but
also those obligations that had accumulated 11 years earlier in
its employee leasing agreement with MIT 80. It would also owe 15
or 20 percent of these accumulated amounts as "overrides", and,
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