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Because our calculations show that the net present value, as of
1980, of the up-front payments exceeds the net present value of
net receipts by $178,656, we have determined Sav-Fuel’s net
cashflow to be negative $178,656. The details of our conclusion
are contained in the attached appendix. Our finding of a
projected negative cashflow (disregarding tax considerations)
demonstrates that Sav-Fuel could not reasonably have hoped to
recoup its investment in the EMS, much less earn an economic
profit independent of tax considerations.
II. Addition to Tax Under Section 6659(a)
Under section 6659, a graduated addition to tax is imposed
when an individual has an underpayment of tax of at least $1,000
that is attributable to a valuation overstatement. Sec. 6659(a),
(d). A valuation overstatement exists if the value of any
property, or the adjusted basis of any property, claimed on any
return exceeds 150 percent of the amount determined to be the
correct valuation or adjusted basis. Sec. 6659(c)(1). If the
claimed valuation exceeds 250 percent of the correct value, the
addition is equal to 30 percent of the underpayment. Sec.
6659(b).
Petitioner’s claimed loss deduction was related to the value
of the EMS. As discussed earlier, the PPM states that Sav-Fuel
purchased the EMS from Nisona in 1980 for $10,350,000, despite
the fact that an earlier sale in 1980 of the EMS between
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