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might have intruded if Machise encountered financial difficulty,
and its creditors undertook to collect those notes. Fred
precluded collection of the notes by executing "termination
agreements" on behalf of both the alleged debtors and lenders in
the employee leasing agreements. He did so in order to "get rid
of the risk" that the notes would ever be paid.
The Pettisanis' claimed interest payments are based upon a
debt transaction that was not conducted at arm's length by two
economically self-interested parties. Moreover, that debt is
based upon "peculiar circumstances"--in particular offsetting
transactions and the MIT 82 termination agreement--indicating
that it would not be paid. For tax purposes, we therefore
disregard that debt and the interest it allegedly generated.
Respondent properly disallowed the interest deductions claimed by
the Pettisanis.
III. Intercoastal Is Not Entitled To Deduct From Its Income the
Accrued Interest, Management Fees, or Override Payments to
the Leasing Partnerships
The final substantive question is whether Intercoastal,
through its subsidiary Machise, was entitled to deduct amounts
generated by its dealings with the partnerships. Once again, the
factors that show the employee leasing transactions to be shams
also apply to the Intercoastal/Machise deductions.
It is obvious that Machise was induced to participate in the
employee leasing program by the promise of substantial tax
benefits. In exchange for running its business normally, it
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