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In turn, F&G leased the recyclers to Masters. Pursuant to
the lease and in accordance with applicable provisions of the
Internal Revenue Code and Treasury regulations, F&G elected to
treat Masters as having purchased the recyclers for purposes of
the investment and business energy tax credits.
Simultaneously, Masters entered into a joint venture with PI
and Resin Recyclers, Inc. (RRI). The joint venture agreement
provided that RRI was to assist Masters with the placement of
recyclers with end-users. At the same time, PI, ECI, F&G,
Masters, and RRI entered into arrangements that provided that PI
would pay a monthly joint venture fee to Masters, in the same
amount that Masters would pay as monthly rent to F&G, in the same
amount as F&G would pay monthly on its note to ECI, in the same
amount that ECI would pay each month on its note to PI. In
connection with these arrangements, PI, ECI, F&G, Masters, and
RRI entered into offsetting agreements so that these monthly
payments were kept only as bookkeeping entries and no money
actually was transferred. Consequently, all of the monthly
payments required among the entities in the above transactions
offset each other, and the transactions occurred simultaneously.
On its 1982 tax return Masters reported that the four
recyclers had an aggregate basis of $7,000,000, or $1,750,000
each, for purposes of the investment and business energy tax
credits. In the present cases, the parties stipulated that in
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