- 97 -
value of the equipment at the time of the purchase had little
effect on the pretax profitability of the transaction. The pretax
profitability was dependent on the residual value at the early
termination date or the final termination date; the overall
profitability was dependent on the tax savings. See Zirker v.
Commissioner, supra at 976; Helba v. Commissioner, supra at 1005-
1007, 1009-1011.
iii. The Structure of the Financing
The structure of the financing is an important factor in
evaluating the claimed economic substance of the sale-leaseback
transactions. Helba v. Commissioner, supra at 1007-1011. In this
case, most of the purchase price of the properties was financed by
debt that in reality was functionally identical to nonrecourse
obligations.
On numerous occasions, courts have found that a
disproportionately large amount of nonrecourse debt included in the
purchase price of a piece of property indicates that a transaction
lacks economic substance. See, e.g., Waddell v. Commissioner, 86
T.C. 848, 902 (1986), affd. per curiam 841 F.2d 264 (9th Cir.
1988); Elliott v. Commissioner, 84 T.C. 227, 238 (1985), affd.
without published opinion 782 F.2d 1027 (3d Cir. 1986); Estate of
Baron v. Commissioner, 83 T.C. 542, 552-553 (1984), affd. 798 F.2d
65 (2d Cir. 1986). This is especially true when, as a practical
matter, there is little possibility that the debt will ever be
paid.
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