- 66 -
when the effect of the deduction, credit, or other allowance
would be to distort the liability of the taxpayer, as evidenced
by, inter alia, the "unreal or unreasonable relation which the
deduction, credit, or other allowance bears to the transaction."
Respondent contends that the NOL's in issue have an "unreal or
unreasonable relation" to the acquisition in issue. We disagree.
Petitioner acquired a going concern, actively engaged in the same
line of business as petitioner. After the acquisition and
dropdown, petitioner continued to operate the Tri-Power
properties along with the dropdown properties. Accordingly, we
do not believe that the acquisition and dropdown distorted the
NOL's in issue "so that they no longer bear a reasonable business
relationship to the interests or enterprises which produced
them". For the same reasons, we do not believe that the NOL's
bear an "unreal or unreasonable relation" to the acquisition and
dropdown.
Section 1.269-3, Income Tax Regs.
Next, respondent turns to the regulations for support.
Section 1.269-3(b)(1) and (c)(2), Income Tax Regs., provides
that, in the absence of additional evidence to the contrary, the
following transactions are ordinarily indicative that the
principal purpose for the acquisition was evasion or avoidance of
Federal income tax:
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