                        T.C. Memo. 1999-179



                      UNITED STATES TAX COURT



    MATO L. MARINOVICH AND DAPHNE MARINOVICH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 36934-86, 21754-89.            Filed May 28, 1999.



     John T. Morin and Edward S. Saviano, for petitioners.

     Elizabeth Girafalco Chirich, for respondent.



                        MEMORANDUM OPINION


     SWIFT, Judge:   This matter is before us in these

consolidated cases on respondent's motion for summary judgment

with regard to the deductibility as a loss under section

165(c)(2) of the amount of cash invested in a tax shelter

partnership.
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     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.


                           Background

     Petitioners invested in White Rim Oil and Gas Associates,

1980 (White Rim), a Utah limited partnership that was part of a

group of tax-oriented limited partnerships that had the stated

general objective of, among other things, investing in enhanced

oil recovery technology for the recovery of oil and natural gas.

     The parties herein stipulate that White Rim's transactions,

for all relevant purposes, were identical to those of Technology

Oil and Gas Associates, 1980 (Technology 1980), one of the

partnerships involved in our test case opinion in Krause v.

Commissioner, 99 T.C. 132 (1992), affd. sub nom. Hildebrand v.

Commissioner, 28 F.3d 1024 (10th Cir. 1994).   Further, other than

petitioners' claim for loss deductions under section 165 with

respect to the amount of cash invested in White Rim, petitioners

agree to be bound by Krause with respect to the disallowance of

tax deductions relating to White Rim's claimed losses, interest

expense deductions, and investment credit.

     When the petitions were filed, petitioners resided in New

York, New York.

     During 1980, 1981, 1982, and 1983, petitioners invested in

White Rim by transferring to White Rim $75,000 in cash and by
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executing in favor of White Rim promissory notes in the total

face amount of $385,000.   Petitioners made no payments on the

promissory notes.

     On their Federal income tax returns for 1980, 1981, and

1982, petitioners claimed large losses, interest expense

deductions, and an investment credit relating to their investment

as limited partners in White Rim.   On audit, respondent

disallowed these claimed losses, interest expense deductions, and

investment credit.

      In the Krause v. Commissioner, supra, test cases, we

analyzed, primarily at the partnership level, the objective of

the particular partnership activities and transactions involved

in Krause.   We concluded that the partnership activities and

transactions were tax-motivated and did not have the requisite

profit objective to support the losses claimed, and we sustained

respondent's disallowance of the claimed losses relating to the

taxpayers’ investments in the partnerships.   We found that the

transactions did not constitute legitimate for-profit business

transactions.   Also, on the ground that the underlying debt

obligations did not constitute genuine debt, we sustained

respondent's disallowance of the claimed interest deductions

relating thereto, and we imposed an increased interest rate under

section 6621(c).    We did not sustain respondent's determinations

under sections 6653(a)(1) and (2), 6659, and 6661 of additions to
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tax for negligence, for valuation overstatements, and for

substantial understatements of tax.

     As indicated, our findings and holdings in Krause v.

Commissioner, supra, were affirmed by the U.S. Court of Appeals

for the Tenth Circuit.

     For purposes of this motion for summary judgment,

petitioners concede that no profit objective existed at the White

Rim partnership level, and respondent concedes that profit

objective existed at the individual partner level.


                           Discussion

     Under section 165(a), deductions are allowed for losses

sustained during the taxable year not compensated for by

insurance or otherwise.

     Under section 165(c)(2), in order for individual taxpayers

to be entitled to loss deductions with respect to funds invested

in partnerships, the underlying partnership transactions must

have economic substance, and, at the partner level, the

individual taxpayers must have had a profit objective for

investing in the partnerships.    See Illes v. Commissioner,

982 F.2d 163, 165 (6th Cir. 1992), affg. per curiam T.C. Memo.

1991-449; Farmer v. Commissioner, T.C. Memo. 1994-342; Wright v.

Commissioner, T.C. Memo. 1994-288.
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     Even if taxpayers invest in the partnerships with the

individual objective of making a profit, taxpayers are not

entitled to deduct out-of-pocket cash invested in the

partnerships as losses under section 165(c)(2) if the partnership

transactions lack economic substance.   See Illes v. Commissioner,

supra at 165; Hoffpauir v. Commissioner, T.C. Memo. 1996-41;

Schafer v. Commissioner, T.C. Memo. 1994-569; Farmer v.

Commissioner, supra; Wright v. Commissioner, supra; Daoust v.

Commissioner, T.C. Memo. 1994-203; Omerza v. Commissioner, T.C.

Memo. 1992-206.

     Further, our finding in Krause v. Commissioner, supra

at 176, that the transactions were tax-motivated and “did not,

and do not, constitute legitimate for-profit business

transactions,” imported that the transactions lacked economic

substance.   See Ferguson v. Commissioner, 29 F.3d 98, 102 (2d

Cir. 1994), affg. Peat Oil & Gas Associates v. Commissioner,

100 T.C. 271 (1993); Nickeson v. Commissioner, 962 F.2d 973, 976

(10th Cir. 1992), affg. Brock v. Commissioner, T.C. Memo. 1989-

641; Gardner v. Commissioner, 954 F.2d 836, 839 (2d Cir. 1992),

affg. per curiam Fox v. Commissioner, T.C. Memo. 1988-570; Bohrer

v. Commissioner, 945 F.2d 344, 348 n.5 (10th Cir. 1991), affg.

Glass v. Commissioner, 87 T.C. 1087 (1986); Kirchman v.

Commissioner, 862 F.2d 1486, 1492-1493 (11th Cir. 1989), affg.

Glass v. Commissioner, 87 T.C. 1087 (1986).
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     Contrary to the above authority and for the limited purpose

of determining the deductibility of losses under section

165(c)(2) relating to the amount of cash invested in

partnerships, petitioners argue that the absence of a profit

objective at the partnership level should be irrelevant, and the

profit objective test should be measured only at the individual

partner level.   Petitioners rely on Echols v. Commissioner, 935

F.2d 703, 709 (5th Cir. 1991), revg. and remanding 93 T.C. 553

(1989), as supporting a loss deduction for the amount of cash

they invested in White Rim.

     In Echols, however, the profit objective of the partnership

was not at issue.   The Echols case involved what was treated as a

legitimate for-profit partnership, and the Court of Appeals for

the Fifth Circuit addressed only the timing and manifestation of

the taxpayers' abandonment of their interest in the partnership

and the worthlessness of their interest in the partnership.

Because the profit objective of the partnership was not

challenged, the Court of Appeals for the Fifth Circuit in Echols

examined only the profit objective at the individual investor

level.

     The parties stipulate that White Rim's transactions, for all

relevant purposes, were identical to those of Technology 1980,

one of the partnerships involved in Krause v. Commissioner,

99 T.C. 132 (1992), in which we concluded that the activities and
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transactions of the partnerships were tax-motivated and did not

constitute legitimate for-profit business transactions.

Petitioners agree to be bound by Krause v. Commissioner, supra,

with respect to the activities of White Rim.       Therefore, we

conclude that the activities and transactions of the White Rim

partnership, like those of Technology 1980, were not legitimate

profit-oriented business dealings and lacked economic substance.

     Because the activities and transactions of the White Rim

partnership lack economic substance, petitioners are not entitled

to a loss deduction under section 165(c)(2) for their cash

investment in the White Rim partnership, notwithstanding their

individual profit objective in investing in the partnership.

     To reflect the foregoing,


                                         An appropriate order will be

                                 issued.
