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investors were not used to pay for mining activity but were
instead paid to promoters, including petitioner.
The evidence establishes that the purpose of the S-J
partnerships was to create tax losses for the partners through
improper deductions relating to alleged advanced royalty
payments.
Based on the above established facts, we conclude that the
transactions entered into by the S-J partnerships lacked business
purpose and economic substance. Petitioner is not entitled to
deduct the claimed losses of $9,269,756 relating to the S-J
partnerships.
Further, under section 1.612-3(b)(3), Income Tax Regs.,
advanced royalties allegedly paid in a year when no mineral is
sold are deductible as a general rule only if the leases were
entered into prior to October 29, 1976. T.D. 7523, 1978-1 C.B.
192, 193. Although the lease agreements in question were
backdated to either October 25, 1976 or October 28, 1976, the S-J
partnerships did not actually own interests in the property prior
to November 1, 1976. Respondent properly disallowed the claimed
advanced royalty payments and the related claimed losses of the
S-J partnerships.
With regard to the various elements of the fraud addition to
tax, petitioner's failure to report taxable income of $1,968,364
and the disallowed losses of $9,269,756 from the S-J partnerships
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