- 16 -
to facilitate the circular, offsetting payment scheme. Except
for the end-user lessees, the transaction between GCC,
petitioner, and Elmco is entirely closed.10 The Depository
Agreement binds all of the parties to the transaction and cannot
be modified, rescinded, or amplified except by a signed writing
by petitioner, Elmco and GCC. Consequently, none of parties to
the transaction can unilaterally cease making payments.
Despite the binding nature of the Depository Agreement,
petitioners argue that section 465(b)(4) is inapplicable because
GCC can refuse to meet its lease obligations. Petitioners assert
that it is not the circularity of the transaction that matters
but whether Elmco would still enforce the Buyer Acquisition Note
if GCC defaults under the lease. Indeed, GCC's refusal to honor
its lease obligations would not compromise Elmco's right to
enforce petitioner's obligations under the Buyer Acquisition
note. The taxpayers in American Principals Leasing Corp. v.
United States, supra, set forth a similar argument, but were
unsuccessful. The court stated:
It is true that the government has directed this court
to no evidence that June Partners' [partnership in
10 GCC did not borrow to purchase the computer equipment.
Accordingly, unlike many purchase and leaseback transactions,
see, e.g., American Principals Leasing Corp. v. United States,
904 F.2d 477 (9th Cir. 1990) and Levien v. Commissioner, 103 T.C.
120 (1994), because there was no underlying loan, no third party
creditor stood by threatening to enforce its security agreement
if GCC defaulted on its loan payments.
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