- 255 -
that interest was actually "paid" on Kersting loans within the
meaning of section 163(a).
In sum, we conclude that the Government misconduct relating
to the Cravens cases constituted harmless error with respect to
Judge Goffe's holdings that the Kersting transactions were shams,
that the loans underlying the various Kersting programs did not
constitute genuine indebtedness, and that interest was not paid
on Kersting loans within the meaning of section 163(a).
2. Mr. Thompson
Mr. McWade's settlement agreement with Mr. Thompson placed a
cap on the Thompsons' tax liabilities for the taxable years 1979,
1980, and 1981, and ensured that the Thompsons would receive
refunds of tax and interest previously remitted to respondent
for those years. The Thompson settlement was amended shortly
before the trial of the test cases to assure that the refunds
that the Thompsons would receive would be more than sufficient
to pay Mr. DeCastro's attorney's fees. The Thompson settlement
created conflicts of interest for Mr. Thompson and Mr.
DeCastro.111
By virtue of his settlement, Mr. Thompson was in a position
to use the trial of the test cases as a forum either to attempt
to further reduce his personal tax liabilities by contesting
111 Mr. DeCastro's conflict in the Thompson cases became
acute when he agreed, in the context of the final revision to the
Thompson settlement, to participate in Messrs. Sims and McWade's
scheme to keep the Thompsons among the test cases petitioners and
to provide the masquerade of trial representation for the
Thompsons as one of the test cases.
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