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1984, 1985, 1986, and 1987) to the partnerships, deductions for
claimed losses attributable to payments of Machise's payroll
costs. Respondent’s second set of determinations denies, for the
years 1983, 1984, 1985, and 1986, deductions for the interest
alleged by the Pettisani petitioners to have been paid on their
1982 note to Machise. Respondent’s third set of determinations
denies Intercoastal, which filed consolidated returns with
Machise, deductions for the years 1982 and 1983 for any amount of
the "overrides" on its payroll costs, the "management fees", and
the interest accrued on its alleged borrowings.
We hold that petitioners are not entitled to the deductions
at issue. Our holdings are based on the overall conclusion that
the transactions giving rise to the claimed deductions had
neither economic substance nor a profit objective.
I. Neither the Partners Nor the Partnerships Are Entitled to
Loss Deductions Based Upon Payment of Machise's Payroll
Costs
The initial question we must answer is whether the partners
(for 1980 and 1982) and the partnerships (for 1983-87) may
deduct, as partnership expenses, the payroll costs for the years
in issue.
A. The Requirement of Economic Substance
"The incidence of taxation depends upon the substance of a
transaction. * * * To permit the true nature of a transaction
to be disguised by mere formalisms, which exist solely to alter
tax liabilities, would seriously impair the effective
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