- 510 -
was not credible. Mallin presented no substantive evidence in
the cases herein. He summarily stated that the transactions were
intended to be profitable. His reasoning was based on the fact
that Kanter was getting a "sweetheart deal".
Mallin did not state how favors given to Kanter would enable
IRA to profit from the deals. Since any profit would result only
if the rents, plus residual value, exceeded the amount of the
cash invested (the downpayment plus note payments), it would not
matter that Mallin permitted IRA to pay only 5 percent down,
rather than 10 percent. If there was no residual value after the
lease expired, the possibility of an economic profit was nil.
See Friendship Dairies. Mallin's testimony is, accordingly,
misleading and not supportive of a proper analysis of
profitability.
Mallin implied, without specific delineation, that IRA could
profit because he claimed the residual value would exceed the
cash invested and that the deals involved leveraged financing.
His analysis did not consider the discounted residual value of
the equipment since inflation was admittedly not taken into
account and thus the time value of money was not considered by
him. This was at a time when inflation was occurring at high
rates. A present value analysis is important to the
determination of whether a transaction has economic substance, as
discussed in Hilton v. Commissioner, 74 T.C. at 353 n.23, where
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