William G. and Debra C. Kellen - Page 6




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          C.  Petitioner’s Investment in San Nicholas Research, Ltd.                  
               In late 1983, petitioner signed a subscription agreement and           
          purchased 15 limited partnership units (an 11.719-percentage                
          interest) in San Nicholas Research, Ltd. (San Nicholas or the               
          partnership).6  Petitioner purchased the partnership units                  
          pursuant to a private placement memorandum dated October 10,                
          1983.  See infra pp. 6-8, 8-11.                                             
               Petitioner paid $2,790 per limited partnership unit, or a              
          total of $41,850, for his 15 units in San Nicholas.  Of this                
          amount, $1,140 per unit, or $17,100 for 15 units, was paid in               
          cash.  The balance, $1,650 per unit or $24,750 for 15 units, was            
          payable pursuant to a 10-year promissory note.7                             
               At the time that he signed the subscription agreement,                 
          petitioner believed that his investment in San Nicholas offered             
          tax benefits, and his decision to invest was influenced by that             
          belief.                                                                     
          D.  Putative Nature of San Nicholas’ Business                               
               According to the private placement memorandum dated October            
          10, 1983 (the offering memorandum), San Nicholas was formed in              

               6 The general partner and tax matters partner of San                   
          Nicholas was Alfred M. Clancy, an individual whom petitioner did            
          not know at the time that he invested in San Nicholas.                      
               7  The note, which was recourse in form, contemplated                  
          payments of interest only for the first 5 years.  As matters                
          actually transpired, in the late 1980s, the limited partners were           
          given the option of paying a discounted percentage of the                   
          principal in cash.  Petitioner elected this option.                         





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