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Respondent contends that the partnerships are required to
report interest income derived from both the PPNs and CDs as well
as the LIBOR notes. Respondent further contends that petitioner
failed to prove that the amounts paid to Fides and Cravath,
Swaine, & Moore are legitimate partnership expenses.
Consistent with our determination that the partnerships’
purchase and sale of the PPNs and CDs will not be respected for
tax purposes, we agree with petitioner that the interest paid on
the PPNs and CDs is not includable in the partnerships’ income
for the years in issue. See, e.g., Sheldon v. Commissioner, 94
T.C. 738, 762 (1990). Consistent with this holding, the
partnerships are not entitled to any deductions associated with
the purchase and sale of the PPNs and CDs.
The parties are in agreement that the partnerships are
required to include in their taxable income the interest payments
that they received on the LIBOR notes during the taxable years in
issue. Consistent with the parties’ agreement on this point, we
conclude that the partnerships are entitled to deduct a portion
of the fees that Saba and Otrabanda paid to the Cravath firm.
Respondent disallowed a deduction of $120,266 that Saba had
reported for amounts paid to the Cravath firm during the taxable
year ended March 31, 1991, as well as the amortization of $1,500
and $8,500 attributable to amounts paid to the Cravath firm for
the taxable years ended March 31, 1991 and June 21, 1992,
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