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partnership; (3) partnership items would be reallocated to
Brunswick (90 percent) and Skokie (10 percent); and (4)
Brunswick's basis in the 4 LIBOR notes was $17,458,827. In
addition, respondent disallowed certain deductions. First,
respondent disallowed $25,000 of a $50,823 deduction that
Otrabanda had reported for amounts paid to N.V. Fides during the
taxable year ended June 21, 1991. The $25,000 item was labeled
"incorporation fee". In addition, respondent disallowed a
deduction of $72,996 that Otrabanda had reported for amounts paid
to Cravath, Swaine & Moore during the taxable year ended June 21,
1991. Respondent determined that the disallowed amounts had not
been substantiated and that petitioner had failed to demonstrate
that the amounts represented ordinary and necessary business
expenses.
Respondent made several alternative determinations in the
event the Court were to recognize Otrabanda as a partnership for
Federal income tax purposes. Respondent determined in pertinent
part: (1) No gain or loss would be recognized on the purchase
and sale of the IBJ CDs because the transactions lacked economic
substance; and (2) Otrabanda’s basis in the LIBOR notes
distributed to Brunswick was $17,458,827.
OPINION
The central issue in these cases is whether the
partnerships' CINS transactions should be disregarded for Federal
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