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The opening paragraph of Thompson’s letter read as follows:
You have retained us to review the Confidential Private
Offering Memorandum (“Memorandum”) of Whitman Recycling
Associates for the purpose of preparing and advising you
with regard to Form 3468 to be filed with your 1982 tax
return. Based upon our review of the Memorandum, we have
prepared a Form 3468 as enclosed (with lines 18-27 yet to be
completed), showing a full crediting of the amounts shown on
your K-1 from the Partnership. It is our belief that the
tax treatment of such items is more likely than not the
proper treatment. However, we do not opine as to any other
matters which may or may not be covered in the Memorandum or
the opinion of the counsel therein.
Thompson did not consider his letter to be a rousing
endorsement of the investment; rather, he considered the
investment to be “aggressive”, and his letter was replete with
“areas of concern” and various disclaimers. One area of concern
focused on the value of the EPS recyclers:
Obviously, the fair market value (“FMV”) of the
Sentinel EPS Recyclers (“Recyclers”) is important
because it is the starting point for determining the
amount of credits available to the Partnership.
Although I am not in a position to judge the FMV of the
Recyclers, the valuation made in the Memorandum is
challengeable. First of all, with regard to Ex. F,
[Burstein’s and Ulanoff’s reports], neither evaluator
appears to be primarily a property appraiser, and
neither engages in an economic analysis of cost of
production of the Recyclers, reasonable profit,
comparables, capitalization of income, or other factors
normally used in equipment appraisals.
Other areas of concern focused on the step-up in purchase price
from ECI to F&G, potential conflicts of interest, possible lack
of arm’s-length negotiations, F&G’s purported $7 million basis in
the recyclers, use of nonrecourse financing, and the circular
nature of the transactions.
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