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to make payments on the partners' 12-percent notes to Machise.
Each year, BBPA treated some part of the partners' note payments
to Machise as the partners' payment of interest. Frank and
Lucille Pettisani accordingly claimed Schedule E interest expense
deductions of $20,000, $18,921, $17,733, $16,427 and $21,697 on
Frank Pettisani's investment in MIT 82 for the years 1983 through
1987, respectively. Respondent has disallowed these deductions
as lacking economic substance.
We agree; respondent is correct. The congeries of factors
that show the employee leasing transactions to be without
economic substance similarly dispose of the interest deductions
at issue. The alleged payments of interest were only a part of a
prearranged plan devised by Fred. There was no independent
third-party lender to whom the interest was owed. Fred's plan
instead provided that Machise would be both the lender and the
debtor in the same transaction. Thus, when Machise made payments
on its debts to the partnerships, those payments circled back to
it as the partners' payments, including interest, on their debts
to Machise. There were no cash payments. Such repayments as
were made took the form only of notes or bookkeeping entries.
The Pettisanis' alleged payments of interest were thus only part
of the paper circle of obligations. That circle gave the
illusion of interest payments but lacked economic effect.
There was no possibility that the Pettisanis' notes would
enter into the world of commercial reality. Commercial reality
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