- 2 -
D. Other Aspects of Petitioner’s Claimed Losses and
Deductions With Respect to the Second Lease Strip
Deal............................................... 29
II. Petitioner’s 1995 Through 1997 Advances to Cap Corp.
and the December 2, 1996, Debt Conversion Transaction.. 32
A. Cap Corp. and Its Business......................... 32
B. Petitioner’s 1995 and 1996 Advances to Cap Corp.... 35
C. The December 2, 1996, Debt Conversion Transaction.. 38
D. Petitioner’s 1997 Advances to Cap Corp............. 40
E. Petitioner’s 1997 Ordinary Loss and Bad Debt
Deduction; Petitioner’s 1998 AeroCentury Stock
Transaction........................................ 41
1. The $2 Million Consulting Fee.................. 43
2. Petitioner’s Advances to Koehler .............. 50
Opinion..................................................... 52
I. Petitioner’s Second Lease Strip Deal................... 53
A. Did the Underlying Transactions Have Economic
Substance?......................................... 54
1. Generally...................................... 54
2. Background and Recapitulation of the Two Lease
Strip Transactions............................. 57
3. Petitioner’s Rental Expense Deductions and Note
Disposition Losses............................. 62
4. Did Petitioner Have a Nontax Business Purpose
for Entering Into the Second Lease Strip
Transaction?................................... 64
5. Whether Petitioner’s Lease Strip Deal Had
Economic Profit Potential Aside From the Tax
Benefits....................................... 70
a. The Experts’ Opinions...................... 74
i. Petitioner’s Expert.................... 75
(a) Svoboda’s Opinions as to the Fair
Market Values and Estimated Residual
Values................................. 76
(b) Svoboda’s Fair Market Value for
the Over Lease Residual Interests...... 77
ii. Respondent’s Expert.................... 79
b. Evaluation and Comparison of the Experts... 82
c. Petitioner’s Lease Strip Deal’s Economic
Profit Potential........................... 85
6. Conclusion as to the Economic Substance of
Petitioner’s Lease Strip Deal.................. 86
B. Petitioner’s Entitlement to Its Claimed Deductions. 90
II. Petitioner’s $2,052,900 Ordinary Loss and $1,859,135
Bad Debt Deduction..................................... 91
A. Petitioner’s Claimed Deductions--the Debt vs.
Equity Issue....................................... 91
B. Application of the 11-Factor Test.................. 94
1. Names Given to the Documents................... 94
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