10
operation, but those problems were not so severe as to prevent
the system from being placed in service.
Respondent argues that we should disregard Lone Star's
$2,621,798 cost basis in the system, because there were no arm's-
length negotiations over the purchase price. To support this
argument, respondent notes that Murphy served as legal counsel
for Micro-Bio when Micro-Bio acquired the chlor-alkali system
technology from Eltech. There is no evidence that Murphy
influenced the terms of the transaction between Micro-Bio and
Eltech. Before Lone Star agreed to purchase the chlor-alkali
system from Eltech, Murphy reviewed financial projections
prepared by Micro-Bio. After reviewing the information at his
disposal, Murphy concluded that the purchase of the chlor-alkali
system was a sound investment. While the matter is not free from
doubt, we find that Lone Star acquired the chlor-alkali system in
an arm's-length transaction.
Sands is entitled to her share of the Lone Star depreciation
deduction in each of the taxable years 1984, 1985, and 1986 based
on the foregoing facts.
2. Interest Deductions and Other Deductions
Lone Star reported interest expenses of $70,360 and $48,786
for taxable years 1984 and 1985, respectively. Lone Star
reported "other deductions" of $19,227 and $38,612 for taxable
years 1984 and 1986, respectively. Sands deducted her
proportionate shares of these items, and respondent disallowed
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