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"interest" for a relatively nominal sum ($10,000) shortly after
the questioned transaction. The substance of this transaction
was separation from the joint ventures, and this was inconsistent
with a capital contribution. By issuing Forms 1099-A and
reporting income from the cancellation of indebtedness,
Commercial and ESL treated the arrangement as a cessation of
their interest and cancellation of indebtedness.
The June 20, 1988, draft agreement contains the statement
that the parties desired the cancellation of the partnerships’
indebtedness. It was not until 8 days later, i.e., after tax
advice was obtained and the final agreement prepared, that any
mention of a contribution to capital occurred. This is
illustrative of the plan--Commercial wanted out of its creditor
status; any purported capital contribution was a mere provision
that was not otherwise in sync with the plan. Petitioners did
not enter into the Agreement to increase or expand their capital
structure. Cf. Perlman v. Commissioner, 27 T.C. 755, 758 (1957),
affd. 252 F.2d 890 (2d Cir. 1958).
Commercial’s accountant, in his June 28, 1988, memorandum,
suggests the true nature of the transaction. Notwithstanding the
fact that tax advice was sought, Commercial’s accountant was
asked to review the draft agreement, the terms of which were
incorporated into the final agreement. Based on his independent
review, the accountant concluded that the draft agreement was
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