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Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981),
the partnerships applied one-sixth of their bases in
the PPNs and CDs in computing their "gains" on the
sales of the PPNs and CDs. Due to a large disparity in
the partners' initial capital contributions to the
partnerships, ABN was allocated 90 percent of the
"gains" on the sales of the PPNs and CDs. As a foreign
entity, ABN's distributive share of the partnerships'
"gains" was not subject to U.S. income tax.
Following the close of the partnerships' first
taxable year, ABN's interests in the partnerships were
reduced through direct purchases by B and redemptions
by the partnerships. S and O subsequently distributed
cash to ABN and the LIBOR notes to B. B sold the LIBOR
notes for cash. Relying on the ratable basis recovery
rules under sec. 15A.453-1(c), Temporary Income Tax
Regs., supra, B allocated the remaining bases in the
PPNs and CDs in computing its "losses" on the sales of
the LIBOR notes. For the taxable years ending 1990 and
1991, B reported capital losses of $142,953,624 and
$32,631,287, respectively.
Held: The disputed transactions were not
motivated by legitimate non-tax business purposes and
were not imbued with objective economic substance.
Held, further, the disputed transactions are shams that
will not be respected for Federal income tax purposes.
Held, further, the partnerships' income for the years
in issue does not include interest earned on the PPNs
and CDs. Held, further, the partnerships are entitled
to deductions for certain organizational expenses
subject to the limitations contained in sec. 709(b),
I.R.C.
Joel V. Williamson, Thomas C. Durham, Daniel A. Dumezich,
Clisson S. Rexford, Gary S. Colton, Jr., Stuart E. Thiel, Neil B.
Posner, and Judith P. Zelisko, for petitioner.
Jill A. Frisch, Karen P. Wright, Lewis R. Mandel, and
Theresa G. McQueeney, for respondent.
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