                          109 T.C. No. 13



                      UNITED STATES TAX COURT



                ROBERT L. WHITMIRE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No.   21849-84.           Filed October 29, 1997.



          Held: Notwithstanding the recourse nature of a
     third-party bank loan, due to various loss-limiting
     features associated with a computer equipment leasing
     transaction, petitioner is not to be regarded as at
     risk under sec. 465, I.R.C., with regard to related
     partnership debt obligations.



     Stephen D. Gardner, for petitioner.

     Elizabeth P. Flores, Martin L. Shindler, Marcie B. Harrison,

Brian J. Condon, Victoria J. Kanrek, and David A. Williams, for

respondent.
                                 - 2 -

                                OPINION


     SWIFT, Judge:     This matter is before the Court on the

parties’ cross-motions for partial summary judgment.    Rule

121(b).   This is a test case, and the motions for partial summary

judgment raise an issue that will affect the outcome of other

cases.

     These cross-motions raise the general question of whether

petitioner is to be regarded as at risk within the meaning of

section 465 with regard to partnership debt obligations

associated with a computer equipment leasing transaction.       More

specifically, these motions raise the question as to whether,

notwithstanding the recourse nature of a third-party bank loan,

certain guaranties, commitments, suspension and setoff

provisions, and matching payments, among other features of the

transaction, should be treated as protecting petitioner against

any realistic possibility of realizing a loss on the transaction.

     For 1980, respondent determined a deficiency in petitioner's

Federal income tax in the amount of $21,399.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code of 1954 as in effect for the year in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     When the petition was filed, petitioner resided in Marina

Del Ray, California.
                               - 3 -


Original Purchase Transaction and End-User Lease

     On or about February 15, 1980, International Business

Machines Corp. (IBM) sold for $2,056,060 certain computer

equipment to Alanthus Computer Corp. (ACC), an equipment leasing

corporation.   Approximately 1 month later, on March 13, 1980, ACC

sold the computer equipment to Alanthus Corp. (Alanthus), its

parent corporation, for the same consideration of $2,056,060.

     In connection with its purchase of the computer equipment,

Alanthus borrowed $1,868,657 from Manufacturers Hanover Leasing

Corp. (MHLC) in an arm's-length credit transaction.   The loan

proceeds were used by Alanthus, with additional cash of $187,403,

to pay ACC the full purchase price of the computer equipment.

ACC apparently used the proceeds received from Alanthus to pay

IBM the full purchase price due on ACC’s purchase of the computer

equipment.

     Under Alanthus’ 7-year promissory note issued in favor of

MHLC (Alanthus Note), beginning June 1, 1980, monthly payments of

$33,875 representing principal and interest at 13.25 percent per

annum were due and payable to MHLC.    As collateral for the loan,

MHLC received security interests in the computer equipment and in

lease payments due under all end-user leases of the computer

equipment until the full amount of the loan plus interest was

repaid.
                              - 4 -

     The Alanthus Note and security agreement do not expressly

indicate whether MHLC’s $1,868,657 loan to Alanthus was made on a

recourse or a nonrecourse basis.   The parties, however, agree and

we so find that as a secured loan, under New York Uniform

Commercial Code (N.Y.U.C.C.) section 9-504(2) (McKinney 1990),

this loan is to be treated as made on a recourse basis.

     On February 11, 1980, in anticipation of its acquisition of

the above computer equipment, ACC entered into a lease agreement

with Manufacturers and Traders Trust Co. (MTT) under which ACC

leased the above computer equipment to MTT.   Under this end-user

lease, MTT was obligated to pay monthly rent of $33,875

commencing June 1, 1980, and continuing for a term of 7 years.

During the 7-year term, MTT was required to make the lease

payments directly to MHLC in payment of the monthly payments that

were due to MHLC on the Alanthus Note.

     On March 13, 1980, in connection with the sale of the

computer equipment from ACC to Alanthus, ACC assigned to Alanthus

its interest as lessor in the end-user lease with MTT.


Purchase by Partnership and Related Transactions

     On June 30, 1980, three additional and essentially

simultaneous transactions occurred involving the computer

equipment with the apparent ultimate objective, among other
                              - 5 -

things, of transferring ownership1 of the computer equipment

(subject to the secured interests therein of MHLC) to Petunia

Leasing Associates (Petunia), the equipment leasing partnership

in which petitioner invested and through which petitioner now

claims the losses and expenses at issue in this case.

     In the first transaction, Alanthus sold the computer

equipment and assigned its interest as lessor in the end-user

lease to F/S Computer Corp. (F/S Computer).   Immediately

following that transaction, F/S Computer resold the computer

equipment to F.S. Venture Corp. (F.S. Venture).   F.S. Venture

then resold the computer equipment to the Petunia partnership.

MHLC’s security interests in the computer equipment and in the

payments due from the end user under the end-user lease were not

affected by any of these transactions.

     Alanthus sold the computer equipment to F/S Computer for the

stated price of $2,122,329, of which $267,288 was paid in cash.

As payment for the balance of the purchase price, F/S Computer

assumed the $1,868,657 principal amount of Alanthus’ debt

obligation to MHLC and the monthly payment obligations to MHLC on

the Alanthus Note.



1
      Use in this opinion of “ownership”, “purchase”, “sale”, and
other words that normally suggest economic and legal ownership of
property, or the transfer of same, is for convenience only and
does not constitute any finding or conclusion as to which entity
should be regarded, for income tax purposes, as the owner of the
computer equipment.
                              - 6 -

     In the second transaction, F/S Computer sold the computer

equipment to F.S. Venture for the stated price of $2,056,060.

F.S. Venture paid $20,000 in cash to F/S Computer, issued to F/S

Computer a promissory note in the amount of $1,982,289, and

assigned to F/S Computer the right to receive an additional

$53,771 due from Petunia.

     The loan documentation and the promissory note of F.S.

Venture in favor of F/S Computer do not indicate whether this

loan was made on a recourse or nonrecourse basis.   F/S Computer

did not receive a security interest in the computer equipment or

any other collateral with regard to the $1,982,289 promissory

note it received from F.S. Venture.

     F.S. Venture did not assume the debt obligation of Alanthus

or of F/S Computer with regard to the $1,868,657 loan of MHLC.

     Further, under a commitment agreement dated June 30, 1980,

between F/S Computer and F.S. Venture (Commitment Agreement), F/S

Computer agreed, for the benefit of F.S. Venture and all

subsequent purchasers of the computer equipment including

Petunia, to satisfy all principal and interest payment

obligations relating to the $1,868,657 MHLC loan and all monthly

lease payments relating to the end-user lease.   The Commitment

Agreement expressly provided as follows:


     In order to induce * * * [F.S. Venture] to acquire the
     Equipment subject to the * * * [MHLC loan] * * * [F/S
     Computer] hereby agrees, for the benefit of * * * [F.S.
     Venture] and any subsequent purchaser of the Equipment
                              - 7 -

     * * * [that F/S Computer] will satisfy all obligations
     due under * * * [the MHLC loan] * * *. * * *


     In the third transaction, F.S. Venture sold to Petunia the

computer equipment for the stated price of $2,056,060 represented

by a cash downpayment of $34,268 and a promissory note from

Petunia in the total principal amount of $2,021,792 (Partnership

Note).

     Petunia did not assume the debt obligation of Alanthus or of

F/S Computer with regard to the MHLC $1,868,657 loan, nor did

Petunia assume the debt obligation with regard to F/S Computer’s

loan of $1,982,289 to F.S. Venture.

     Petunia’s $2,021,792 stated debt obligation to F.S. Venture

on the Partnership Note is referred to generally in loan

documents as a limited recourse obligation of Petunia.    Under

terms of the Partnership Note and Petunia’s partnership

agreement, each limited partner is stated to be personally and,

on a recourse basis, liable for stated principal on the

Partnership Note to the extent of 434.75 percent of each limited

partner’s total capital contributions to the partnership (subject

to certain adjustments pursuant to the partnership agreement).

     Under an agreement between Petunia and F.S. Venture (that

accompanied Petunia's Partnership Note), F.S. Venture was

obligated to make any outstanding payments (or to make provision

for such payments) due to a senior lienholder, such as MHLC, in

order to prevent the senior lienholder from foreclosing on the
                               - 8 -

computer equipment.   In the event that F.S. Venture failed to

make such payments or to make provision for such payments,

Petunia’s obligations under the Partnership Note would be

suspended until the last installment of the Partnership Note was

due and payable.   At that point in time, if the loan from the

senior lienholder remained in default, Petunia would be entitled

to set off any amounts it owed on the Partnership Note against

any amounts that F.S. Venture owed to the senior lienholder as a

result of this security agreement.

     Under the $2,021,792 Partnership Note, interest accrued at

12 percent per annum and payment of prepaid interest in the

amount of $308,409 was due and payable on July 30, 1980, of which

$188,472 was immediately payable in cash and the balance was

represented by delivery of a promissory note with a principal

amount of $119,937.   Also under the Partnership Note, on July 1,

1980, an interest payment of $674 was due and payable by Petunia

to F.S. Venture, and from July 1, 1980, to December 1, 1982,

monthly interest payments of $9,938 were due and payable to F.S.

Venture.   From January 1, 1983, through December 1, 1989, monthly

principal and interest payments totaling $35,690 on the

Partnership Note were due and payable to F.S. Venture.

     Petunia's monthly payment obligations to F.S. Venture (of

$9,938 that were due from July 1, 1980, to December 1, 1982, and
                               - 9 -

of $35,690 that were due from January 1, 1983, through December

1, 1989) matched F.S. Venture’s monthly payment obligations owed

to F/S Computer under F.S. Venture's promissory note to F/S

Computer.

     In connection with Petunia’s purchase of the computer

equipment from F.S. Venture, F.S. Venture assigned its rights

against F/S Computer under the Commitment Agreement to Petunia.

     Further, on June 30, 1980, MHLC, F/S Computer, F.S. Venture,

and Petunia entered into a separate side agreement (Side

Agreement) that expressly provided that Petunia and the partners

of Petunia had no liability whatsoever with regard to MHLC’s

$1,868,657 recourse loan that was made to Alanthus and that was

assumed by F/S Computer.   The Side Agreement expressly provided

as follows:


     * * * [MHLC] agrees that * * * [Petunia] has no
     personal liability whatsoever for payment of the
     amounts due under * * * [the loan from MHLC to
     Alanthus] or [for] satisfaction of * * * [Alanthus']
     obligations thereunder. * * *


Leaseback Transaction to F/S Computer

     Simultaneous with the above three sale transactions and with

the other agreements that were entered into on June 30, 1980,

Petunia leased the computer equipment back to F/S Computer for a

term of 9½ years beginning on June 30, 1980, and ending on

December 31, 1989.   Under the leaseback transaction, F/S

Computer’s monthly rent payments of $9,938 that were payable to
                               - 10 -

Petunia from July 1980 to December 1982, matched Petunia’s

monthly debt obligations owed to F.S. Venture under the

Partnership Note.   From January 1983 through December 1989, F/S

Computer’s monthly rent payments of $35,935 that were payable to

Petunia slightly exceeded Petunia’s monthly debt obligations of

$35,690 owed to F.S. Venture under the Partnership Note.

     Pursuant to the lease agreement with F/S Computer, and in

addition to the lease payments mentioned above, Petunia also was

entitled to receive from F/S Computer, 40 percent of all net

rental income until June 30, 1989, with respect to the end-user

lease after end-user lease payments had been applied to payments

due MHLC under the Alanthus Note.    Thereafter, Petunia was

entitled to receive 90 percent of all net rental income with

respect to the end-user lease until termination of the lease

period.

     At the time of the above transactions, F/S Computer and F.S.

Venture were wholly owned by Funding Systems Asset Management

Corp. (Funding).    Funding in turn was wholly owned by FSC Corp.

(FSC).

     In order to induce Petunia to enter into the above purchase

and lease transactions with F.S. Venture and F/S Computer, FSC

unconditionally and on a full recourse basis expressly guaranteed

Petunia and its limited partners the full performance of all

obligations of F/S Computer under F/S Computer’s leaseback of the
                             - 11 -

computer equipment from Petunia.   The written guaranty from FSC

(Guaranty Agreement) provided, in relevant part, as follows:


     FSC CORPORATION (the “Guarantor”) * * * does hereby
     unconditionally guarantee to [Petunia] * * * the prompt
     and full performance and observance of all of the
     covenants, conditions and agreements of [F/S Computer]
     * * * including, without limitation, the full and
     prompt payment when due, whether by acceleration or
     otherwise, in accordance with the terms of the Lease,
     of rent and all other sums payable by * * * [F/S
     Computer] to * * * [Petunia], whether absolute or
     contingent, secured or unsecured, matured or unmatured,
     and without regard to any grace periods provided for in
     the Lease, including, without limitation, payment of
     any stipulated loss value, deficiency payments, and all
     other sums due upon an Event of Default by * * * [F/S
     Computer] * * *. * * *


Under the Guaranty Agreement, FSC also expressly guaranteed F/S

Computer’s obligations to Petunia under the Commitment Agreement

that had been assigned by F.S. Venture to Petunia.


Petitioners’ Investment in Petunia and Losses Claimed

     On June 27, 1980, petitioner executed a subscription

agreement pursuant to which petitioner became obligated to

contribute $25,032 to the capital of Petunia in exchange for a

limited partnership interest in the partnership.   Petitioner’s

contribution was reflected by $16,282 in cash that was paid to

Petunia and by an $8,750 recourse promissory note issued by

petitioner in favor of Petunia.

     During June of 1980, petitioner and other investors executed

subscription agreements obligating them to contribute a total of
                                - 12 -

$339,173 to the capital of Petunia.      Petunia received $339,173 in

capital contributions of which $220,611 was contributed in cash

and the remainder of which was represented by promissory notes.

     On Schedule E of his Federal income tax return for 1980,

petitioner reported flow-through losses from Petunia totaling

$40,623.

     On audit, respondent disallowed the $40,623 in partnership

losses claimed by petitioner.


Discussion

     Summary judgment or partial summary judgment may be granted

if the pleadings and other materials demonstrate that no genuine

issue exists as to any of the material facts and that a decision

may be rendered as a matter of law.      Rule 121(b); Sundstrand

Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965

(7th Cir. 1994).

     In Levien v. Commissioner, 103 T.C. 120, 125-130 (1994),

affd. without published opinion 77 F.3d 497 (11th Cir. 1996),

Thornock v. Commissioner, 94 T.C. 439, 447-449 (1990), and Levy

v. Commissioner, 91 T.C. 838, 862-865 (1988), we explained

generally legal principles applicable to the at-risk issue

involved in this case.   Under section 465, where individual

investors or closely held corporations engage in the leasing of

depreciable property, any loss with respect to the leasing

activity is allowed only to the extent the investors are
                               - 13 -

financially at risk with respect to the leasing activity at the

close of the taxable year.    Sec. 465(a)(1), (c)(1)(C).2

     Investors generally are considered to be financially at risk

with respect to investments in leasing activities to the extent

they contribute money to the activities.    Sec. 465(b)(1)(A).

Investors also are considered to be financially at risk with

respect to debt obligations of leasing activities to the extent

they are personally liable for repayment of the debt obligations

or to the extent they have pledged property, other than the

property used in the activities, as security for the borrowed

amounts.   Sec. 465(b)(2).3




2
      Sec. 465 was added to the Internal Revenue Code by the Tax
Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, 1531, and
applies to tax years beginning after Dec. 31, 1975.
3
     Sec. 465(b)(2) provides as follows:

          (2) Borrowed Amounts.n-For purposes of this
     section, a taxpayer shall be considered at risk with
     respect to amounts borrowed for use in an activity to
     the extent that he--

                (A) is personally liable for the
           repayment of such amounts, or

                (B) has pledged property, other than
           property used in such activity, as security
           for such borrowed amount (to the extent of
           the net fair market value of the taxpayer’s
           interest in such property).

     No property shall be taken into account as security if
     such property is directly or indirectly financed by
     indebtedness which is secured by property described in
     paragraph (1).
                               - 14 -

     With respect to particular debt obligations, investors will

be regarded as personally liable for such obligations within the

meaning of section 465(b)(2)(A) if they are ultimately

economically liable to repay the obligations in the event funds

from the investment activities are not available to repay the

obligations.    The fact that other investors or participants

remain in the “chain of liability” does not preclude investors

who have the ultimate economic liability from being treated as at

risk.    In determining which investors or participants in a

transaction are ultimately financially responsible for the debt

obligations, the substance of the transaction controls.

Pritchett v. Commissioner, 827 F.2d 644, 647 (9th Cir. 1987),

revg. and remanding 85 T.C. 580 (1985); Follender v.

Commissioner, 89 T.C. 943, 949-950 (1987); Melvin v.

Commissioner, 88 T.C. 63, 75 (1987), affd. per curiam 894 F.2d

1072 (9th Cir. 1990); see also Raphan v. United States, 759 F.2d

879, 885 (Fed. Cir. 1985).

     The above limitation on debt obligations with respect to

which investors will be considered at risk is expressly reflected

in the statutory scheme.    Section 465(b)(4)4 provides that even


4
        Sec. 465(b)(4) provides as follows:

          (4) Exception.--Notwithstanding any other
     provision of this section, a taxpayer shall not be
     considered at risk with respect to amounts protected
     against loss through nonrecourse financing, guarantees,
     stop loss agreements, or other similar arrangements.
                              - 15 -

though investors nominally may be personally liable with respect

to debt obligations, for income tax purposes they will not be

considered at risk for debt obligations if their ultimate

liability with respect to the debt obligations is protected

against loss through “nonrecourse financing, guarantees, stop

loss agreements, or other similar arrangements.”

     The language “other similar arrangements” is not

specifically defined in the Code or in the legislative history,

but the legislative history evidences concern with situations in

which investors are effectively immunized from any realistic

possibility of suffering an economic loss even though the

underlying transaction is not profitable.   Levien v.

Commissioner, supra at 125-130; Larsen v. Commissioner, 89 T.C.

1229, 1272-1273 (1987), affd. in part, revd. and remanded in part

sub nom. Casebeer v. Commissioner, 909 F.2d 1360 (9th Cir. 1990);

Bennion v. Commissioner, 88 T.C. 684, 692 (1987); Melvin v.

Commissioner, supra at 70-71; Porreca v. Commissioner, 86 T.C.

821, 838 (1986); S. Rept. 94-938 at 49 (1976), 1976-3 C.B. (Vol.

3) 49, 87.

     As applied particularly to a highly leveraged, tax-oriented

equipment leasing transaction (and depending on the issues

raised), the above principles require us to analyze the substance

and commercial realities of all material aspects of the

transaction.   Neither the form chosen, the labels used, nor a

single feature of the transaction generally will control.
                                - 16 -

     In American Principals Leasing Corp. v. United States, 904

F.2d 477 (9th Cir. 1990), it was stated with regard to section

465(b)(4), as follows:


     the purpose of subsection 465(b)(4) is to suspend at
     risk treatment where a transaction is structured--by
     whatever method--to remove any realistic possibility
     that the taxpayer will suffer an economic loss if the
     transaction turns out to be unprofitable. A
     theoretical possibility that the taxpayer will suffer
     economic loss is insufficient to avoid the
     applicability of this subsection. We must be guided by
     economic reality. If at some future date the
     unexpected occurs and the taxpayer does suffer a loss,
     or a realistic possibility develops that the taxpayer
     will suffer a loss, the taxpayer will at that time
     become at risk and be able to take the deductions for
     previous years that were suspended under this
     subsection. [Id. at 483; citations omitted.]


     The potential bankruptcy or insolvency of entities providing

guaranties or loss protection to investors is not considered in

applying section 465(b)(4) unless it creates a realistic

possibility of economic loss.    Thornock v. Commissioner, 94 T.C.

439, 454 (1990); Capek v. Commissioner, 86 T.C. 14, 52 (1986).

In this regard, the report from the Senate Finance Committee with

respect to section 465 states as follows:


          For purposes of this rule [i.e. section
     465(b)(4)], it will be assumed that a loss-protection
     guarantee, repurchase agreement or insurance policy
     will be fully honored and that the amounts due
     thereunder will be fully paid to the taxpayer. The
     possibility that the party making the guarantee to the
     taxpayer, or that a partnership which agrees to
     repurchase a partner’s interest at an agreed price,
     will fail to carry out the agreement (because of
     factors such as insolvency or other financial
                             - 17 -

     difficulty) is not to be material unless and until the
     time when the taxpayer becomes unconditionally entitled
     to payment and, at that time, demonstrates that he
     cannot recover under the agreement. [S. Rept. 94-938 at
     50 n.6 (1976), 1976-3 C.B. (Vol. 3) 49, 88.]


     In Thornock v. Commissioner, 94 T.C. 439 (1990), a case with

facts similar to the instant case, we held that no realistic

possibility existed that limited partners would be ultimately

liable on partnership debt obligations.   Our holding was based

primarily on the presence of rent guaranties, the essentially

offsetting nature of the various lease and note payments, the

nonrecourse nature of the underlying third-party loan, and other

insulating features of the equipment leasing transaction.    We

emphasized that no one feature of the transaction controlled our

analysis.

     The parties have agreed that under New York commercial law

the underlying $1,868,657 third-party loan from MHLC to Alanthus

should be treated as a recourse loan.   See N.Y.U.C.C. section 9-

504(2) (McKinney 1990), which provides that a secured loan

generally is to be treated as a recourse loan where the parties

to the loan fail to designate the loan as either recourse or

nonrecourse.5

5
       N.Y.U.C.C. sec. 9-504(2) (McKinney 1990) provides in part
as follows:

          (2) If the security interest secures an
     indebtedness, the secured party must account to the
     debtor for any surplus [after proceeds from the sale of
                                                   (continued...)
                             - 18 -

     In an attempt to distinguish the instant case from Thornock

v. Commissioner, supra, and other similarly decided cases,

petitioner emphasizes the recourse nature, under New York law, of

the underlying third-party secured loan of MHLC.   Petitioner

describes various scenarios under which petitioner alleges that

there would exist a realistic possibility that petitioner

ultimately would be required to make actual payments on the

partnership loan if MHLC, the third-party creditor, pursued

collection from F/S Computer, F.S. Venture, or from Petunia.

Petitioner argues that, primarily because of the recourse nature

of the Alanthus promissory note to MHLC, petitioner was not

insulated from liability on Petunia’s debt obligations.

Petitioner further argues that section 465(b)(4) should not apply

to rent guaranties.

     We disagree with each of petitioner’s arguments.   Analyzing

the substance of the equipment leasing transaction before us, we

conclude that petitioner and the other limited partners of

Petunia are not to be treated as at risk under section 465 with

respect to the debt obligations of Petunia.   The limited partners

of Petunia were protected from any realistic possibility of

economic loss on this transaction.



5
      (...continued)
     collateral are applied to the outstanding debt], and,
     unless otherwise agreed, the debtor is liable for any
     deficiency. * * *
                               - 19 -

     Assuming that MTT defaulted on its lease obligations under

its end-user lease and that MHLC commenced collection efforts

that broke the circle of payments (or accounting entries) between

F/S Computer, F.S. Venture, and Petunia jeopardizing Petunia’s

ability to make payments due on its debt to F.S. Venture, before

any liability of the limited partners would be triggered, FSC

would have been required to honor its obligations under the

Guaranty Agreement, thereby providing funds needed by Petunia to

pay F.S. Venture.   FSC, through its guaranties--not the limited

partners of Petunia--would be required to provide funds (or

accounting entries) necessary to keep payments current on the

debt obligations of Petunia.

     The obligations of FSC and F/S Computer under the Guaranty

and Commitment Agreements, the suspension and setoff provisions

under the purchase agreement between F.S. Venture and Petunia,

the fact that F.S. Venture and Petunia did not assume Alanthus’

recourse promissory note to MHLC, the provisions of the Side

Agreement (to which MHLC itself was a party) that expressly

immunized Petunia from any liability on Alanthus’ recourse

promissory note to MHLC, and the matching payments under the

various essentially offsetting obligations effectively immunized

Petunia from any realistic possibility for loss in connection

with the transaction in issue.

     Petitioner suggests a scenario under which FSC would not

honor its guaranties, and petitioner suggests that under that
                              - 20 -

scenario the limited partners of Petunia likely would be required

to make payments on Petunia’s debt obligations to F.S. Venture.

In that scenario, on the basis of the relationships between the

various parties, the guaranties of FSC, the Commitment and Side

Agreements, and the suspension and setoff provisions of the

agreement between F.S. Venture and Petunia, we believe the

limited partners of Petunia would have legal defenses against

FSC, F/S Computer, F.S. Venture, and MHLC that would protect the

limited partners of Petunia from any realistic obligation to make

any actual payments under the Partnership Note.

     Further, the hypothetical inability of a guarantor such as

FSC to satisfy guaranty obligations due to bankruptcy or

insolvency generally is not to be considered in applying section

465(b)(4) unless it contributes to a realistic possibility of

economic loss.   Thornock v. Commissioner, 94 T.C. 439, 454

(1990); Capek v. Commissioner, 86 T.C. 14, 52 (1986); S. Rept.

94-938 at 50 n.6 (1976), 1976-3 C.B. (Vol. 3) 49, 88; see also

Van Roekel v. Commissioner, T.C. Memo. 1989-74, 56 T.C.M. (CCH)

1297, 1307-1308, 1989 T.C.M. (P-H) par. 89,074, at 89-341; Young

v. Commissioner, T.C. Memo. 1988-440, affd. 926 F.2d 1083 (11th

Cir. 1991), with regard to the significance of a parent

corporation’s guaranty of its subsidiary’s debt obligation.

     We do not believe that under any of petitioner’s suggested

scenarios Petunia and its limited partners would be held liable

for the debt obligations associated with this transaction.
                              - 21 -

Petitioner's scenarios are so remote and theoretical as to be

commercially unrealistic and improbable.   See Casebeer v.

Commissioner, 909 F.2d 1360, 1369 (9th Cir. 1990), affg. in part,

revg. and remanding in part Larsen v. Commissioner, 89 T.C. 1229

(1987); American Principals Leasing Corp. v. United States, 904

F.2d 477, 483 (9th Cir. 1990); Waters v. Commissioner, T.C. Memo.

1991-462, affd. 978 F.2d 1310 (2d Cir. 1992).

     Finally, we do not agree with the argument petitioner makes

that section 465(b)(4) should be restricted only to loss

protection guaranties that relate directly to the particular debt

obligations for which a taxpayer claims to be at risk.   The total

integrated transaction and all of its associated guaranties,

commitments, and setoff provisions are to be taken together.

FSC’s guaranties constituted an integral part of the loss-

limiting arrangement that insulated Petunia and its limited

partners from any realistic risk of loss associated with this

transaction.   FSC’s obligations under the Guaranty Agreement

should not be disregarded.   See Thornock v. Commissioner, supra

at 451.

     Due to the offsetting nature of the lease and note payments,

the presence of the Guaranty, Commitment and Side Agreements, the

presence of the suspension and setoff provisions, and the

relationships of the parties involved in the transaction, we

conclude that Petunia participated in a loss-limiting arrangement

under section 465(b)(4) and that no realistic possibility existed
                             - 22 -

that petitioner would be ultimately liable to make payments on

Petunia’s debt obligations to F.S. Venture.

     Notwithstanding the recourse nature of the underlying third-

party loan between MHLC and Alanthus, other significant features

of the transaction, as explained above, immunized petitioner and

the other limited partners of Petunia from any realistic

possibility of liability with regard to the Partnership Note.    We

conclude that petitioner is to be treated as not at risk within

the meaning of section 465 with respect to his allocable share of

the Partnership Note.

     To reflect the foregoing,


                                        An appropriate order will

                                   be issued.
