-303-
Holdings lacked the capacity to repay the debt from its assets--
it had no assets of any discernible value.
Shearman & Sterling’s memorandum is limited to the debt
versus equity issue. It does not discuss any other relevant
issues. The memorandum was not prepared in connection with the
filing of SMP’s and Corona’s 1997 and 1998 partnership tax
returns. It was offered into evidence only for the purpose of
showing that Mr. Lerner relied on it in characterizing the SMHC
receivables as debt on SMP’s 1998 partnership tax return. We
conclude that this memorandum does not provide reasonable cause
for SMP’s or Corona’s tax treatment with respect to the relevant
issues in these cases.
6. Grant Thornton Memorandum
The Ackerman group hired the accounting firm of Grant
Thornton, LLP, as its accountants for SMP and SMHC. Howard
Levinton, who was a tax partner at Grant Thornton, was assigned
to SMP and SMHC. In connection with the preparation of SMP’s and
SMHC’s tax returns, Mr. Levinton prepared a memorandum dated
May 1, 1998, concerning the tax issues regarding SMP. Mr. Lerner
testified: “I was particularly interested in his analysis of the
fact that Credit Lyonnais unexpectedly put the interest to us
easily a year ahead of what I expected it. Not that I expected
it at all. I thought that was very relevant in the preparation
of the return because it affected any number of issues.” Mr.
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