- 3 -
case are substantially identical to the transactions in Provizer
v. Commissioner, supra. In Provizer, the Court held that the
transactions involving Sentinel EPE2 recyclers (recyclers) were
so lacking in economic substance that they were to be disregarded
for Federal income tax purposes.
In a series of simultaneous transactions closely resembling
those in Provizer, Packaging Industries Group, Inc. (PI),
manufactured and sold3 four recyclers to Ethynol Cogeneration,
Inc. (ECI), for $3,924,000. ECI agreed to pay PI $327,000 for
the recyclers at closing, with the balance of $3,597,000 financed
through a 12-year nonrecourse promissory note (ECI note). ECI
resold the recyclers to F&G Equipment Corp. (F&G) for $4,650,668.
F&G agreed to pay $377,000 in cash, with the balance of
$4,273,668 financed through a 12-year partial recourse promissory
note (F&G note). The F&G note was purportedly recourse to the
extent of 20 percent of its face value; however, the recourse
portion was payable only after the nonrecourse portion was
satisfied.
2 EPE stands for expanded polyethylene.
3 Terms such as “sale” and “lease”, as well as their
derivatives, are used for convenience only and do not imply that
the particular transaction was a sale or lease for Federal tax
purposes. Similarly, terms such as “joint venture” and
“agreement” are also used for convenience only and do not imply
that the particular arrangement was a joint venture or an
agreement for Federal tax purposes.
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