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carryforwards in issue, paid no regular Federal income tax during
the period 1987 to 1993.
Respondent disallowed petitioner's deductions for the Tri-
Power NOL carryforwards on the ground that the principal purpose
for petitioner's acquisition of Tri-Power and subsequent dropdown
of its oil and gas producing properties to Tri-Power was the
evasion or avoidance of Federal income tax.
IV. Petitioners' Return Preparation and Tax Advice From Arthur
Andersen
From petitioners' inception through the years in issue,
Arthur Andersen audited petitioners, certified their financial
statements, and prepared their Federal corporate income tax
returns. Petitioners selected Arthur Andersen because it
performed similar services for petitioner's former parent, KN
Energy, and because it represents more independent oil and gas
companies than any other accounting firm. During 1991, 1992, and
1993, petitioners' lacked the available accounting staff needed
to assist in the preparation of their Federal corporate income
tax returns because of commitments created by several
acquisitions. Accordingly, petitioners engaged a certified
public accountant (C.P.A.) in Denver, Colorado, to assist
petitioners' controller in preparing certain schedules and
workpapers for review by Arthur Andersen. Petitioners provided
those schedules and workpapers to Arthur Andersen for use in
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