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Before November 1994, CLI (an entity unrelated to
petitioner) owned certain computer, photo processing, and
satellite dish equipment that was leased to various entities
unrelated to petitioner. Most of these existing leases were
scheduled to end during the spring, summer, or winter of 1997.
In late 1994 and early 1995, petitioner arranged a first
lease strip deal for CFX. According to a tax opinion, CFX, in
exchange for a cost of approximately $2.9 million, would receive
approximately $13.8 million in deductions. The $2.9 million to
be paid by CFX was divided among the participants and others who
arranged the deal, including CLI and petitioner. Petitioner
earned $611,655 for its services in arranging the first lease
strip deal for CFX.
A second lease strip deal involving some of the same
equipment was initiated approximately 9 months later. In the
first and second lease strip deals there were at least 17
interrelated transactions with respect to the same equipment.
Under the second lease strip deal, petitioner claimed over $4.2
million in deductions for 1995, 1996, and 1997. Petitioner’s
out-of-pocket cost for the “investment” in its second lease strip
deal approximated 1 percent of the claimed deductions or slightly
more than $40,000.
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