                        T.C. Memo. 1998-305



                      UNITED STATES TAX COURT



                    ASA INVESTERINGS PARTNERSHIP,
          ALLIEDSIGNAL INC., TAX MATTERS PARTNER, Petitioner
            v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27320-96.                     Filed August 20, 1998.



     Jerome B. Libin, Steuart H. Thomsen, David A. Roby, Jr.,

William S. Corey, Robert S. Chase II, Alexa Temple Dubert, and H.

Karl Zeswitz, Jr., for petitioner.

     Jill A. Frisch, Anne O. Hintermeister, Leslie J. Spiegel,

Peter J. Graziano, James M. Guiry, and Robert A. Baxer, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   Respondent issued ASA Investerings
                               - 2 -


Partnership (ASA) a notice of final partnership administrative

adjustment (FPAA) that reflected adjustments to ASA's partnership

return for taxable years which ended on May 31, 1990, May 31,

1991, December 31, 1991, and June 1, 1992.   On December 24, 1996,

AlliedSignal Inc. (AlliedSignal), ASA's tax matters partner,

petitioned the Court to redetermine respondent's adjustments to

partnership items.

      ASA was created by AlliedSignal, AlliedSignal Investment

Corp., Barber Corp. N.V., and Dominguito Corp. N.V.   The primary

issue for decision is whether these corporations formed a valid

partnership for Federal income tax purposes.   We hold that they

did not.

      Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years in issue, and Rule

references are to the Tax Court Rules of Practice and Procedure.

                         FINDINGS OF FACT

      Some of the facts have been stipulated and are so found.    On

the date AlliedSignal filed the petition, ASA had no principal

place of business because it had previously ceased operations.

I.   AlliedSignal and the Merrill Lynch Proposal

     AlliedSignal, a Delaware corporation, is a manufacturing

company that produces aerospace and automotive products.   It was

formed in September 1985 when Allied Corp. merged with The Signal

Companies, Inc.
                               - 3 -


     In January 1990, AlliedSignal decided to sell its interest

in Union Texas Petroleum Holdings, Inc. (UTP), an oil, gas, and

petrochemical company.   AlliedSignal expected to sell its

interest before February 1991 and to realize a capital gain of

approximately $446,700,000.   Robert Luciano, a member of

AlliedSignal's Board of Directors (the Board), informed

AlliedSignal's Chief Financial Officer, John Barter, that Merrill

Lynch & Co., Inc. (Merrill Lynch), an investment bank, had

developed a tax proposal that could create capital losses to

shelter AlliedSignal's anticipated capital gain.   Mr. Luciano,

who also served on Merrill Lynch's Board of Directors, further

explained that he was associated with another corporation that

had participated in a similar Merrill Lynch-designed transaction.

     AlliedSignal decided to get more information about the

proposal.   In February 1990, E.S.P. Das, Merrill Lynch's Vice-

Chairman of Investment Banking, and other Merrill Lynch

representatives, described the plan to Roger Matthews,

AlliedSignal's Assistant Treasurer, and other AlliedSignal

representatives.   The proposal, according to Merrill Lynch's

representatives, included the following steps:

     1. A partnership is formed by AlliedSignal with a
     foreign partner not subject to U.S. taxation.

     2. The partnership is capitalized with cash
     contributions, primarily from the foreign partner, who
     would be the majority partner after the initial
     contributions.
                                - 4 -


     3. The partnership purchases high-grade, floating-rate
     private placement notes (PPNs), which include put
     options, permitting the notes to be sold to the issuer
     at par.

     4. The partnership sells the PPNs for consideration
     consisting of 80 percent cash and 20 percent LIBOR-
     indexed installment notes (LIBOR notes)1.

     5. The partnership reports the sale of the PPNs using
     the installment method under section 453. The gain is
     allocated according to each partner's partnership
     interest (i.e., the foreign partner recognizes most of
     the gain).

     6. The partnership purchases high-grade financial
     instruments. Income on such instruments is allocated
     among the partners.

     7. AlliedSignal buys a portion of the foreign
     partner's interest and becomes the majority partner.

     8. The partnership distributes the LIBOR notes to
     AlliedSignal and cash to the foreign partner.
     AlliedSignal sells the LIBOR notes.

     9. The partnership liquidates within 12 to 24 months
     of formation.

Merrill Lynch's representatives explained that the PPN sale could

be reported pursuant to the installment sale rules.   Under these

rules, a small fraction of the PPNs' basis would be used to

calculate the gain on the sale and the remaining basis would be

allocated to the LIBOR notes.   Thus, the PPN sale would create a

large capital gain, and the LIBOR note sale would create a large


     1
        LIBOR (London Interbank Offering Rate) is the interest
rate that most international banks dealing in Eurodollars charge
each other for large loans. The contingent obligations are
called LIBOR notes because payments are based on the product of
LIBOR times a notional amount.
                               - 5 -


capital loss.   The tax-exempt foreign partner would be allocated

most of the capital gain, and AlliedSignal would realize the

capital loss.

     Merrill Lynch representatives further explained that the

proposal was a package deal.   Merrill Lynch would serve as the

partnership's2 financial adviser and, for a $7 million fee,

recruit the foreign partner and arrange for the issuance and sale

of the PPNs and LIBOR notes.   To ensure a market for such

issuance and sale, Merrill Lynch would structure and enter into

the requisite swap transactions.   Merrill Lynch would also serve

as the partnership's financial intermediary, earning an

additional $1,060,000 to $2,130,000 on the PPN sale and $212,000

to $425,000 on the LIBOR note sale.    The foreign partner, for its

participation in the transaction, would charge AlliedSignal the

greater of $2,850,000 or 75 basis points (b.p.)3 on funds

advanced to the partnership.   In addition, AlliedSignal would pay

all of the partnership's expenses.     Merrill Lynch estimated that

AlliedSignal's total expenses for the entire venture4 would be



     2
        We refer to ASA as a "partnership" and AlliedSignal, ABN,
ASIC, Barber, and Dominguito as "partners". These terms are used
for convenience and are not intended to have any legal
significance.
     3
         One basis point is equal to 1/100th of 1 percent.
     4
        We refer to the entire series of transactions as the
"venture". This term is used for convenience and is not intended
to have any legal significance.
                                 - 6 -


between $11,300,000 and $12,600,000.

      In March 1990, G. Peter D'Aloia, AlliedSignal's Treasurer

and Vice President of Taxes, and Mr. Barter, presented the plan

to Edward Hennessy, AlliedSignal's Chairman and CEO.     Mr. Barter

and Mr. D'Aloia recommended that Mr. Hennessy approve the plan

because of its tax advantages.    Mr. Hennessy decided that the

proposal should be presented at the Board's April 30, 1990,

meeting and that prior to such meeting the Board's Executive

Committee should consider the proposal.    On April 16, 1990, the

Board's Executive Committee convened, and Mr. D'Aloia described

the proposal and its essential steps.    Although the foreign

partner's identity had not yet been revealed to AlliedSignal, the

executive committee approved the proposal and an initial $110

million contribution.   Two weeks later, after a brief

presentation of the proposal's potential tax benefits, the Board

approved the venture.

II.   Algemene Bank Netherlands N.V.

      Prior to April 16, 1990, Mr. Matthews was concerned that the

venture's success would depend on the post-formation decisions of

a foreign partner whose identity had not yet been revealed to

AlliedSignal.   When he expressed this concern to Merrill Lynch,

Mr. Das assured him that the foreign partner would be an AA- or

AAA-rated international bank that would participate in the

venture at AlliedSignal's direction.     Although AlliedSignal had
                               - 7 -


not yet been told, Merrill Lynch had already chosen Algemene Bank

Netherlands N.V. (ABN) to serve as the foreign partner.

     ABN, one of The Netherlands' largest commercial banks, had

participated in several similar Merrill Lynch-designed

transactions.   ABN and AlliedSignal already had a lending

relationship, but ABN believed it could strengthen that

relationship by participating in the venture and being a

compliant partner.

     Mr. Johannes den Baas, Vice President of Corporate Finance

for ABN New York, an ABN affiliate, was responsible for getting

the venture approved.   In seeking such approval, Mr. den Baas

followed ABN's standard procedures for processing loans in excess

of $25 million.   Accordingly, the transaction was processed

through and approved by ABN's North American Credit Committee,

Foreign Credit Department, and headquarters.

     On April 5, 1990, Mr. den Baas sent ABN's Risk Management

Division a memorandum, credit proposal, and AlliedSignal's

financial statements.   He requested authorization to enter into

the venture with AlliedSignal, form two corporations, and lend

$990 million to these corporations.    The corporations would

contribute the $990 million to the venture.    Realizing that ABN

officials would be concerned about repayment dates, he attached

to the credit proposal the following "calendar of events":

     First week of August [1990], Allied Signal Inc. will
     purchase $490mm. of the * * * [corporations'] interests
                              - 8 -


     directly reducing ABN's involvement to $500mm.

     First week of December 1990, the * * * [corporations']
     interests will be further reduced by $300mm., either by
     direct buy-down or distribution of assets from the
     partnership, to $200mm.

     First week of May 1992, the * * * [corporations] will
     be taken out of the partnership fully.

Mr. den Baas described the purpose of the transaction as "the

same as all the other Curacao based partnerships".    The

memorandum further stated:

     AlliedSignal Inc. has a capital gain tax liability and
     this will cure their liability.

     The remuneration will be 30 bps. on the loan * * * to
     the * * * [corporations] plus a fee directly from
     Allied Signal Inc. to ABN New York representing an
     additional 45 bps. over the outstanding amounts bringing
     the total to 75 bps. over LIBOR. Furthermore Allied
     Signal Inc. will make ABN whole for the difference between
     * * *[commercial paper] and LIBOR * * * upfront. The net
     income will be $5.5mm. received partly over time in the
     loan and partly in fees from Allied Signal Inc.

     ABN knew that the partnership's income allocations alone

would not provide the requisite return (i.e., 75 b.p. over LIBOR

on funds transferred to the partnership).    AlliedSignal would

have to supplement these allocations with direct payments to ABN.

As Mr. den Baas stated in another internal memorandum:

     Since the * * * [partnership]   structure itself will not
     carry the possibilities for *   * * [a return of 70-80
     b.p. over LIBOR], income will   be received by ABN New
     York in upfront payments made   by * * * [AlliedSignal].

     Although generally comfortable with the venture, ABN

officials expressed concern regarding a potential loss relating
                                    - 9 -


to the sale of the PPNs.     In an April 22, 1990, memorandum, Mr.

den Baas assured them that any such loss would be added to the

value of the LIBOR notes and, ultimately, borne by AlliedSignal

when the LIBOR notes were distributed to it.     ABN officials

wanted this arrangement included in the partnership agreement but

Mr. den Baas explained that a written agreement was not feasible:

       Of course, this arrangement cannot be included in the
       documentation since in that case it would not be a
       matter of a general partnership. Even a side letter
       would seriously weaken this position. * * *

Mr. den Baas further explained that if AlliedSignal reneged on

its promise to bear any loss relating to the sale, ABN would not

allow the partnership to distribute the LIBOR notes to

AlliedSignal.    After receiving these and other assurances, the

loan-approval committees authorized ABN's participation in the

venture.

III.    Formation of ASA

       A.   The Bermuda Agreement

       In Bermuda, on April 17 and 18, 1990, Mr. Matthews, Mr. den

Baas, and Peter H. de Beer, Deputy Managing Director of ABN Trust

Company Curacao N.V. (ABN Trust), an ABN affiliate, met together

for the first time.     Prior to this meeting, Merrill Lynch

carefully explained the proposal to both ABN's and AlliedSignal's

representatives.     As a result, all parties entered the meeting

with a detailed understanding of the venture and their respective

obligations.     The negotiations between AlliedSignal and ABN
                              - 10 -


focused on ABN's expected return and the venture's transaction

costs.   These negotiations culminated in various agreements,

which we refer to collectively as "the Bermuda Agreement".

     Mr. Matthews and Mr. den Baas agreed that AlliedSignal would

pay all of the partnership's expenses and that AlliedSignal would

pay ABN a return, which we refer to as ABN's "specified return",

equal to ABN's funding costs (i.e., approximately LIBOR) plus 75

b.p. on funds advanced to the partnership.    ABN's specified

return consisted of income allocations, and AlliedSignal's direct

payments, to ABN.   In essence, the direct payments would equal

the difference between the specified return and the income

allocations.   The precise amount of the specified return would

depend on the amount of ABN funds held by the partnership and the

amount of time that the partnership held such funds.

AlliedSignal and ABN also agreed that ABN would receive partial

repayment during the partnership's existence (i.e., August 1990

and March 1991) and full repayment by May 1992.

     Mr. den Baas wanted AlliedSignal to pay "up-front" $5

million of the specified return.   Mr. Matthews, however, wanted

to delay the payment as long as possible to ensure ABN's

adherence to the venture's scheduled steps.    Mr. den Baas and Mr.

Matthews discussed various ways to characterize and structure

AlliedSignal's direct payments to ABN.   Ultimately, they decided

to characterize some of these payments as "premiums".    They
                                - 11 -


further agreed that these premium payments would be made upon the

occurrence of certain events.

     B.   Structure and Funding of ASA

     On April 18, 1990, AlliedSignal formed AlliedSignal

Investment Corp. (ASIC), a wholly owned subsidiary.    On the same

day, Barber Corp. N.V. (Barber) and Dominguito Corp. N.V.

(Dominguito) were formed.    Each corporation was owned by two

Netherlands Antilles foundations controlled by ABN Trust:    Barber

was owned by the Demian Foundation and the Freya Foundation,

while Dominguito was owned by the Aida Foundation and the Carmen

Foundation.    Each foundation contributed $3,000 to its

corporation in exchange for 3,000 shares with a par value of $1

per share.    Thus, Barber and Dominguito were each capitalized

with $6,000.

     Barber, Dominguito, and ABN entered into revolving credit

agreements that provided for Barber and Dominguito to pay ABN

interest of LIBOR plus 30 b.p. on the loans.    These loans would

be secured by the stock held by the foundations and, thus,

indirectly by Barber's and Dominguito's partnership interests.

Barber, Dominguito, and ABN also entered into subordinated loan

agreements that provided for interest-free loans from ABN to

Barber and Dominguito.    In addition, each foundation granted ABN

an irrevocable option to acquire, at par value, the shares of the

respective corporation that each foundation owned.
                                - 12 -


       On April 19, 1990, AlliedSignal, ASIC, Barber, and

Dominguito formed ASA as a partnership under New York law.    In

April and May 1990, they transferred a total of $1,100,000,000 to

ASA.   The following chart delineates the amount of funds

transferred by each partner:

                                                  Percentage
                   Amount Transferred to ASA    Interest in ASA

AlliedSignal              $99,000,000                  9
ASIC                       11,000,000                  1
Dominguito                594,000,000                 54
Barber                    396,000,000                 36

The funds that Barber and Dominguito transferred to ASA had been

borrowed from ABN pursuant to their respective revolving credit

agreements.

       C.   The Partnership Agreement

       On April 18, 1990, the partners executed the ASA partnership

agreement.     The partnership agreement did not incorporate the

Bermuda Agreement but provided guidance in the following areas:

       Purpose:   ASA would be organized:


       for the object and purpose of making investments in
       notes, bonds, debentures, and other interest bearing
       instruments, owning, managing and supervising such
       investments, sharing the profits and losses therefrom,
       and engaging in such activities necessarily incidental
       or ancillary thereto. The Partnership is also being
       organized to enable * * * [AlliedSignal and ASIC] to
       reduce their credit risk exposure on investments while
       obtaining a yield in excess of what they could obtain
       from U.S. treasury securities and to enable * * *
       [Barber and Dominguito] to earn a rate of return in
       excess of the rate available on direct investments in
       the securities which the Partnership plans to purchase.
                               - 13 -



    Management:     ASA would be governed by a partnership

committee, consisting of Mr. Matthews, representing AlliedSignal

and ASIC, and Mr. de Beer, representing Barber and Dominguito.

An act of the partnership committee generally would require the

consent of partners whose partnership percentages totaled at

least 95 percent.

     Income Allocations:    Generally, ASA's net income would be

allocated as follows:    If the combined capital of Barber and

Dominguito exceeded 50 percent of the capital of all the

partners, income would be allocated first to AlliedSignal and

ASIC in an amount limited to their invested capital multiplied by

the 90-day Treasury bill rate plus 10 b.p., then to Barber and

Dominguito in an amount limited to their invested capital

multiplied by LIBOR plus 1 b.p., and the balance to each partner

in proportion to its respective partnership interest.    If

Barber's and Dominguito's combined capital did not exceed 50

percent, net income would be allocated in proportion to each

partner's interest.



     Loss Allocations:    Generally, ASA's losses would be

allocated to each partner in proportion to its respective

partnership interest.    Any loss attributable to the bankruptcy of

an issuer of a debt instrument, however, would be allocated as

follows:   If the combined capital of Barber and Dominguito
                               - 14 -


exceeded 50 percent of the capital of all the partners, loss

would be allocated first to Barber and Dominguito to the extent

of the positive balance in their book capital accounts; then to

AlliedSignal and ASIC to the extent of the positive balance in

their book capital accounts; and the balance to each partner in

proportion to its respective partnership interest.   If Barber's

and Dominguito's combined capital accounts did not exceed 50

percent, such loss would be allocated in proportion to each

partner's interest.

     Capital Contributions:    No interest would be paid on any

capital contributions to the partnership, and capital accounts

would be maintained in accordance with section 1.704-1(b), Income

Tax Regs.

     D.    Miscellaneous ASA Matters

     ASA engaged Merrill Lynch as its financial adviser (e.g.,

Merrill Lynch calculated the value of ASA's investments) and N.V.

Fides, a Netherlands Antilles affiliate of ABN, as its investment

adviser.    The Curacao office of N.V. Fides was the principal

office of ASA, and all of ASA's business was to be conducted at

such office.    Pursuant to authorization from N.V. Fides, ABN

opened the "ASA Investerings Partnership Custody Account" at ABN

New York's office and placed ASA's commercial paper in ABN New

York's vault at Bankers Trust.    ASA adopted a fiscal year ending

on May 31 (i.e., consistent with Dominguito's, the majority
                                - 15 -


partner's, fiscal year).

IV.   ASA's Transactions

      A.   Purchase of PPNs

      On April 25, 1990, ASA purchased $850 million of 5-year PPNs

with put options exercisable on November 20, 1991.     Of these

PPNs, $350 million were issued by the Long Term Credit Bank of

Japan (LTCB) and rated AA by Standard and Poor's.     The remaining

$500 million of PPNs was issued by Sumitomo Bank Capital Markets,

Inc. (Sumitomo), and rated AA+ by Standard & Poor's.

      Merrill Lynch induced LTCB to issue the PPNs by arranging

basis swaps (i.e., the exchange of payments based on one variable

interest rate for payments based on another variable interest

rate) that converted LTCB's cost of capital for issuing the PPNs

to an attractive sub-LIBOR interest rate.     These swaps provided

that Merrill Lynch would pay LTCB an amount equal to the coupon

rate of the LTCB PPNs.     In exchange, LTCB paid Merrill Lynch a

sub-LIBOR rate on the face amount of the PPNs.

      B.   Sale of PPNs and Acquisition of LIBOR Notes

      On May 8, 1990, the ASA partnership committee met in Bermuda

and adopted a resolution authorizing and directing the sale of

the PPNs for consideration consisting of approximately 80 percent

cash and 20 percent LIBOR notes.     Between May 17 and 24, 1990,

ASA sold the PPNs to Mitsubishi Bank, Ltd. (Mitsubishi) and

Banque Francaise du Commerce Exterieur (BFCE).     Standard and
                                - 16 -


Poor's rated Mitsubishi AA+ and BFCE AAA.     In exchange for the

PPNs, ASA received $681,300,000 and 11 LIBOR notes.     ASA used the

$681,300,000 to purchase time deposits and 30-day commercial

paper.

     The LIBOR notes had a total notional principal amount of

$434,749,000.    Each of the 11 LIBOR notes required 20 quarterly

payments of an amount equal to 3-month LIBOR (i.e., determined at

the beginning of each payment period) multiplied by approximately

25 percent of the note's notional principal amount.     Payments

were to commence on August 31, 1990, and end on May 31, 1995.

     ABN entered into a complex series of Merrill Lynch-designed

swap transactions involving itself, Barber, Dominguito, and

Merrill Lynch.    These swaps fully hedged ABN's interest rate risk

relating to the LIBOR notes.    Merrill Lynch also structured and

entered into swap transactions with Mitsubishi and BFCE to induce

their participation in the venture.

          1.     Cost of Selling the PPNs

     Merrill Lynch initially told AlliedSignal that the sale of

the PPNs would cost between $1,060,000 and $2,130,000.      On April

13, 1990, 3 days before the executive committee meeting, Merrill

Lynch told AlliedSignal that the PPN sale would cost

approximately $4,250,000.     Merrill Lynch ultimately imposed a

cost of $6,375,000 on the PPN sale.      This cost was imposed

through a reduction in the value of the consideration received by
                               - 17 -


ASA (i.e., the $434,749,000 notional principal amount of the

LIBOR notes would have been greater without the cost).    Merrill

Lynch valued the LIBOR notes at $163,931,068, which was

calculated as follows:

Face Amount                $850,000,000
  Less:
75 b.p. cost                 (6,375,000)
Net Amount                  843,625,000
Plus:
Accrued Interest              1,606,068
  Less: Cash               (681,300,000)
     Value                  163,931,068

On its partnership books, ASA recorded the LIBOR notes' value at

$170,306,068 (i.e., adding $6,375,000, attributable to the cost

of the PPNs sale, to the $163,931,068 fair market value of the

LIBOR notes).

           2.   Installment Sale Reporting

     Because the LIBOR notes provided for 20 quarterly payments

that varied with LIBOR, ASA could not determine the PPNs'

aggregate selling price by the end of its May 31, 1990, taxable

year.   Pursuant to section 15A.453-1(c), Temporary Installment

Sales Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981), ASA used the

installment method for contingent payment sales to report the

sale of the PPNs.   This regulation provides for the ratable

allocation of basis over the term of a fixed-term contingent

obligation.

     For the taxable year ending May 31, 1990, ASA recovered

$141,856,639 (i.e., 1/6) of its reported $851,139,836 basis in
                              - 18 -


the PPNs and reported $539,443,361 of capital gain on the sale

(i.e., $681,300,000 minus $141,856,639).      The gain was allocated

among the partners as follows:

                            Percentage
                          Interest in ASA                  Gain

ASIC                               1                    $5,394,434
AlliedSignal                       9                    48,531,902
Barber                            36                   194,199,610
Dominguito                        54                   291,299,415
   Total                         100                   539,425,361

The installment payments would be received on the LIBOR notes

over 5 additional partnership taxable years (i.e., May 31, 1991,

through May 31, 1995).

V.   AlliedSignal Purchases Majority Interest in ASA

      On August 2, 1990, AlliedSignal issued $435 million of

commercial paper.   On the same day AlliedSignal purchased an

additional interest in ASA for $545 million.      AlliedSignal

purchased 36 percent of ASA from Barber for $397,438,000 and

13.43 percent of ASA from Dominguito for $147,562,000.      The $545

million AlliedSignal paid consisted of a $540,600,000 payment

equal to the value of Barber's and Dominguito's interest (i.e.,

49.43 percent of $1,093,657,933) and a $4,400,000 premium

payment.   AlliedSignal paid the $4,400,000 to compensate for the

shortfall between ABN's specified return and Barber's and

Dominguito's income allocations.       After these purchases, the ASA

interests held by AlliedSignal, ASIC, Barber, and Dominguito were

58.43 percent, 1 percent, 0 percent, and 40.57 percent,
                               - 19 -


respectively.

     In anticipation of AlliedSignal's purchase, ASA revalued its

assets at $1,093,657,933.   This value included the LIBOR notes

valued at $163,964,000.   The value of the LIBOR notes reflected a

$6,342,068 decrease in value since their acquisition and included

$6,375,000 attributable to the cost of selling the PPNs.

     After the August 2 purchase, AlliedSignal and Merrill Lynch

entered into five swaps designed to hedge AlliedSignal's and

ASIC's combined 59.43 percent interest in the LIBOR notes.    Swaps

one through four were designed to eliminate the yield curve risk

(i.e., the risk from the movement of long-term, relative to

short-term, interest rates).   These swaps required AlliedSignal

to pay Merrill Lynch, on a quarterly basis, a fixed rate times

various notional principal amounts in exchange for quarterly

payments of 3-month LIBOR on those same amounts.    The fifth swap

required AlliedSignal to make quarterly payments of 3-month LIBOR

times a certain notional principal amount, in exchange for

quarterly payments of a fixed rate times the same notional

principal amount.

     Between August 31 and September 28, 1990, AlliedSignal

borrowed $435 million from ASA by issuing ASA $435 million of

short-term notes (AlliedSignal Short-Term Notes).   These notes

had a maturity date of December 28, 1990, a money-market yield,

and put and call options exercisable at par on a monthly basis.
                              - 20 -


AlliedSignal used proceeds from the loan to extinguish the

commercial paper it had issued on August 2, 1990.   AlliedSignal

and ASA, in a series of extensions, changed the maturity of the

AlliedSignal Short-Term Notes from December 28, 1990, to December

31, 1993.

VI.   ASA Distributes the LIBOR Notes to AlliedSignal

      On August 21, 1990, the ASA partnership committee met in

Bermuda and authorized a distribution of assets.    The minutes of

this meeting state:

      The Representative of Dominguito Corporation N.V.
      expressed concern over the volatility of the
      investments. He stated that Dominguito would prefer
      cash in any distribution from the Partnership. The
      Representative of Allied-Signal Inc. and Allied-Signal
      Investment Corporation voiced his opinion that they
      expected favorable interest rate fluctuations. He
      stated that they would prefer to receive Installment
      Purchase Agreements in any distribution of assets of
      the Partnership.

Following this meeting, ASA distributed $167,469,860 of LIBOR

notes to AlliedSignal, $2,866,140 of LIBOR notes to ASIC, and

$116,279,033 in cash and commercial paper to Dominguito.

      For purposes of the distribution, ASA valued the LIBOR notes

at $170,336,000.   The value of the LIBOR notes reflected a

$6,372,000 increase in value since August 2, 1990, and included

$6,375,000 attributable to the cost of selling the PPNs.     The

distribution of LIBOR notes resulted in AlliedSignal bearing the

entire $6,375,000 cost of selling the PPNs (i.e., such cost was

embedded in the value of the LIBOR notes).   In addition,
                                  - 21 -


AlliedSignal's and ASIC's combined interest in the LIBOR notes

increased from an approximately 60-percent indirect interest to a

100-percent direct interest.

       AlliedSignal determined that the LIBOR notes' basis was

$709,283,197, computed as follows:



                              1/6 of Cost Basis            Computed Basis
Initial Cost Basis         Allocated to 5/31/90 FYE        on Distribution

$851,139,836           -      $141,856,639            =    $709,283,197

AlliedSignal determined that $697,348,518 of this basis should be

allocated to the LIBOR notes it received and $11,934,677 to the

LIBOR notes ASIC received.

VII.    AlliedSignal Sells A Portion of the LIBOR Notes

       During 1990, AlliedSignal and ASIC sold LIBOR notes for a

total of $50,454,103.      The following chart delineates these

sales:

Date           Purchaser       Basis As Reported          Sale Price
                               By AlliedSignal

 9-06-90      Unibank A/S       $82,599,556           $17,502,543
11-16-90      Generale Bank      82,843,620            17,129,250
11-30-90      Unibank A/S        81,077,631            15,822,310
  Total                         246,520,807            50,454,103

AlliedSignal determined that these LIBOR notes had a total basis

of $246,520,807.     Accordingly, on its 1990 Federal income tax

return, AlliedSignal reported $196,066,704 of capital losses

(i.e., $50,454,103 minus $246,520,807) relating to the sale of

the LIBOR notes and a capital gain of $53,926,336 relating to the
                                - 22 -


sale of the PPNs.    AlliedSignal filed a Form 1139 claiming a

$27,151,087 refund in 1987 attributable to a $181,628,283 net

capital loss carryback (i.e., some of which was attributable to

other capital gains and losses AlliedSignal incurred in 1990).

After the 1990 LIBOR note sale, ASIC held no LIBOR notes and

AlliedSignal held LIBOR notes with a total notional principal

amount of $280,810,000.    The total cost of selling the LIBOR

notes was $6,110,000, rather than Merrill Lynch's initial

estimate of less than $500,000.

     Merrill Lynch structured and entered into swap transactions

that transferred the interest rate risk of the LIBOR notes from

Generale Bank and Unibank A/S to Merrill Lynch.    These swaps were

an effective inducement for the banks to buy the LIBOR notes.       On

November 9, 1990, AlliedSignal entered into its sixth swap with

Merrill Lynch to further hedge its interest rate risk relating to

its LIBOR notes.    After this swap was in place, AlliedSignal was

hedged on 94 percent of its LIBOR notes.    On November 13, 1990,

AlliedSignal purchased 5-year Treasury futures to lock in

interest rates on the LIBOR notes it intended to sell later that

month.

VIII.    Dominguito's Partnership Interest Is Reduced

        On November 22, 1991, ASA redeemed 7.57 percent of

Dominguito's interest for $91,898,434.     The redemption reduced

Dominguito's interest to 33 percent and increased AlliedSignal's
                              - 23 -


and ASIC's respective interests to 65.87 and 1.13 percent.

      Throughout the venture, AlliedSignal and ABN carefully

calculated the shortfall between ABN's specified return and

Barber's and Dominguito's income allocations.   On its 1990

financial records, AlliedSignal recorded the shortfall as an

accrued liability, thereby treating the amount as a present

obligation.   On December 5, 1991, after calculating a shortfall,

AlliedSignal paid ABN $1,631,250.   The payment consisted of:

$765,147 (i.e., the difference between ABN's funding cost and

Barber's and Dominguito's combined income allocations); $231,250

(i.e., interest on $92 million of ABN funds that remained in ASA

until November, rather than March 1991, as had been established

in the Bermuda agreement); and $634,853.   The $634,853 payment

was the difference between the $5 million ABN requested that

AlliedSignal pay "up-front" and the $4,400,000 AlliedSignal paid

on August 2, 1990, plus interest.   AlliedSignal and ABN had

considered making this payment in the form of a "consulting fee",

but they ultimately decided against this characterization.

      On April 8, 1992, ASA redeemed 8 percent of ASA from

Dominguito for $76,961,863.   After the distribution, the ASA

interests held by AlliedSignal, ASIC, and Dominguito were 73.74

percent, 1.26 percent, and 25 percent, respectively.

IX.   ASA Is Liquidated

      During April and May 1992, AlliedSignal representatives and
                              - 24 -


Mr. den Baas discussed ABN's specified return and the liquidation

of ASA.   Mr. den Baas provided AlliedSignal with a schedule

comparing Barber's and Dominguito's income allocations.   The

schedule indicated that from November 22, 1991, through April 30,

1992, Barber's and Dominguito's income allocations exceeded ABN's

funding costs by $152,162.   AlliedSignal prepared several

analyses regarding ABN's return.   Some of these analyses included

a determination of what ABN's return would have been if

AlliedSignal had made a $5 million payment "up-front" and if all

of Dominguito's interest in ASA had been redeemed by May 1992.

Based upon these analyses, AlliedSignal suggested that ABN pay

AlliedSignal $225,741, plus the $152,162 set forth in ABN's

schedule.   Ultimately, ABN agreed to pay AlliedSignal $315,000.

     On May 1, 1992, ASA tendered the AlliedSignal Short-Term

Notes to AlliedSignal, in return for a payment of $435 million

plus accrued interest of $1,646,522.   On the same day, ASA

purchased newly issued 30-year AlliedSignal notes (the

AlliedSignal Long-Term Notes).   The AlliedSignal Long-Term Notes

had a $480 million total notional principal amount and a 9.23

percent interest rate.   On May 20, 1992, ASA exchanged the

AlliedSignal Long-Term Notes for all the stock of ASA

Investments, Inc., a wholly owned subsidiary of ASA, which was

formed to participate in the liquidation of ASA.

     On May 28, 1992, ASIC was liquidated into AlliedSignal and
                               - 25 -


its 1.26 percent ASA interest was transferred to AlliedSignal,

leaving AlliedSignal and Dominguito as ASA's remaining partners

(i.e., AlliedSignal owned 75 percent and Dominguito owned 25

percent).

       On June 1, 1992, representatives of AlliedSignal and

Dominguito met in Bermuda and liquidated ASA.     They allocated

$2.3 million of accrued interest on the AlliedSignal Long-Term

Notes to AlliedSignal; allocated $624,741 of ASA's income to

Dominguito; and transferred $315,000, as previously agreed, from

Dominguito's capital account to AlliedSignal's capital account.

Upon liquidation, AlliedSignal received $3,756,307 and all the

stock of ASA Investments, Inc., and Dominguito received

$150,995,457 and a $10 million MCA Funding Corp. note.

X.    Barber and Dominguito Are Liquidated

       After AlliedSignal's August 1990 purchase of Barber's

interest, ABN exercised its options to acquire, from the Demian

and Freya foundations, Barber's shares at par (i.e., $6,000).

Barber immediately declared a dividend in the amount of its

remaining earnings and current profits.      Three days later, the

Demian and Freya foundations reacquired these shares and

liquidation proceedings subsequently commenced.      Similarly,

following the liquidation of ASA, ABN acquired the amount

received from the liquidation of Dominguito's ASA interest.

XI.    AlliedSignal Sells the Remaining LIBOR Notes
                               - 26 -


       On September 28, 1992, UTP redeemed all of AlliedSignal's

preferred stock and warrants for $355 million.    On November 18,

1992, in a secondary public offering, AlliedSignal tendered all

of its UTP common stock for $585 million.    Thus, AlliedSignal

disposed of its entire interest in UTP for a total of $940

million.

       On November 30, 1992, AlliedSignal sold its remaining LIBOR

notes to BFCE for $33,431,000.    AlliedSignal calculated a basis

of $429,665,738 for these notes and on its 1992 Federal income

tax return, reported a capital loss of $396,234,738 on the sale.

AlliedSignal also reported a capital gain of $264,667,000 on the

sale of its UTP interest.    After taking account of other capital

gains and losses, AlliedSignal had a net capital loss of

$144,741,887.



XII.    Contribution, Distribution, and Expense Summary

       AlliedSignal and ASIC contributed $110 million to ASA and

purchased Barber's and Dominguito's ASA interests for

$540,600,000 (i.e., a total investment of $650,600,000) and

ultimately received distributions from ASA totaling $712,678,500.

AlliedSignal made direct payments to Barber, Dominguito, and ABN

totaling $5,716,250; paid $47,872,343 in interest on the loan

from ASA; received $40,983,490 from its swap transactions; and

paid $24,783,800 of expenses relating to transaction costs (i.e.,
                                - 27 -


attributable to the sale of the PPNs and LIBOR notes) and various

fees (i.e., Merrill Lynch's legal, accounting, and various

financial services fees).

     Barber and Dominguito collectively contributed $990 million

to ASA and ultimately received $1,046,720,226.     The

$1,046,720,226 consisted of:    $540,600,000 from AlliedSignal's

August 2, 1990, purchase of all of Barber's, and a portion of

Dominguito's, interests; $168,860,297 from redemptions of

Dominguito's interest; $331,543,679 in income and property

distributions to Barber and Dominguito; and $5,716,250 in direct

payments from AlliedSignal to Barber, Dominguito, and ABN.     ABN

ultimately received all payments to Barber and Dominguito.     In

addition, ABN received $5,851,355 from its swap transactions.

XIII.    Respondent's Determinations

        On September 27, 1996, respondent issued the FPAA.   In the

FPAA, respondent disallowed the capital gain, portfolio income,

portfolio expenses, and a portion of the basis in the LIBOR notes

reported by ASA.     Respondent reallocated 90 percent of such items

to AlliedSignal and 10 percent of such items to ASIC.

        In the FPAA, respondent contends that ASA is not a valid

partnership and that Barber and Dominguito are not partners.       As

an alternative position, respondent contends that the

transactions lack economic substance.     Respondent further states

that if this contention is sustained, "no gain will be realized
                               - 28 -


or recognized upon the sale of the * * * [PPNs]."    Accordingly,

the primary issue is whether Barber and Dominguito are partners

with AlliedSignal and ASIC.5

                               OPINION

I.    Applicable Law

       The Internal Revenue Code provides that a partnership

includes "a syndicate, group, pool, joint venture or other

unincorporated organization through or by means of which any

business, financial operation, or venture is carried on".      Secs.

761(a); 7701(a)(2).    The existence of a valid partnership depends

on whether:

       considering all the facts--the agreement, the conduct
       of the parties in execution of its provisions, their
       statements, the testimony of disinterested persons, the
       relationship of the parties, their respective abilities
       and capital contributions, the actual control of income
       and the purposes for which it is used, and any other
       facts throwing light on their true intent--the parties
       in good faith and acting with a business purpose
       intended to join together in the present conduct of the
       enterprise.

Commissioner v. Culbertson, 337 U.S. 733, 742 (1949); Maiatico v.

Commissioner, 183 F.2d 836, 838 (D.C. Cir. 1950), remanding 12

T.C. 196 (1949).

II.    The Parties

       For purposes of our analysis, we disregard Barber and

       5
        Because we agree with respondent's primary contention, we
need not decide the economic substance issue. Cf. ACM
Partnership v. Commissioner, T.C. Memo. 1997-115 (addressing the
economic substance issue in a similar transaction).
                                - 29 -


Dominguito.   The following facts demonstrate that Barber and

Dominguito were ABN's agents.    Cf. Commissioner v. Bollinger, 485

U.S. 340 (1988).    First, Barber and Dominguito were thinly

capitalized shell corporations established for the sole purpose

of engaging in the venture.     Second, the parties treated ABN as

the real participant in the venture and disregarded Barber's and

Dominguito's respective corporate forms (e.g., AlliedSignal, on

December 5, 1991, paid ABN $1,631,250 for Barber's and

Dominguito's participation in the venture).    Third, Barber and

Dominguito were mere conduits.    ABN lent Barber and Dominguito

the funds for their respective "capital contributions" and

retained options that allowed ABN to purchase Barber's and

Dominguito's shares for a de minimis amount.    Indeed, Mr. den

Baas testified that eventually all Barber's and Dominguito's

profit "would come back" to ABN.    Similarly, because ASIC is

AlliedSignal's wholly owned subsidiary, we consider AlliedSignal,

not ASIC, the relevant party.    Therefore, the issue is whether

AlliedSignal and ABN intended to join together in the present

conduct of an enterprise.



III.    Joint Undertaking of an Enterprise

       To form a valid partnership, AlliedSignal and ABN must have

intended to join together in the present conduct of an

enterprise.    Commissioner v. Culbertson, supra at 742.
                              - 30 -


Petitioner contends that AlliedSignal and ABN joined together for

the common purpose of investing in interest bearing instruments

and sharing the profits and losses therefrom.   We disagree for

reasons that we summarize here and explain at greater length

below.

     AlliedSignal and ABN had divergent business goals.

AlliedSignal entered into the venture for the sole purpose of

generating capital losses to shelter an anticipated capital gain.

In pursuing this goal, AlliedSignal chose to ignore transaction

costs, profit potential, and other fundamental business

considerations.   In fact, AlliedSignal's Board and the Board's

Executive Committee focused only on potential tax benefits when

they approved the plan.

     In contrast, ABN entered into the venture for the sole

purpose of receiving its specified return.   This return was

independent of the performance of ASA's investments (e.g., the

profitability of the LIBOR notes) and the success of the venture

(i.e., whether AlliedSignal succeeded in generating capital

losses).   Moreover, as will be explained, ABN did not have any

profit potential beyond its specified return and did not have any

intention of being AlliedSignal's partner.   In essence, we agree

with Justice Frankfurter's statement that if an arrangement does

not put all parties "in the same business boat, then they cannot

get into the same boat merely to seek * * * [tax] benefits".
                                - 31 -


Commissioner v. Culbertson, supra at 754 (Frankfurter, J.,

concurring).

IV.   Partnership Formalities

      Petitioner contends that ASA is a bona fide partnership

because the purported partners carefully followed partnership

formalities.    Such formalities may have created a partnership

facade, but the conduct of AlliedSignal and ABN demonstrates that

the Bermuda Agreement, not the partnership agreement, governed

their affairs.

      A.   Income Allocations

      The partnership agreement provided that ASA's income would

be allocated pursuant to a formula.      The income allocations,

however, were merely an artifice to pay ABN's specified return.

AlliedSignal subtracted ABN's income allocations from the

specified return and made up the difference with direct payments.

      On August 2, 1990, AlliedSignal made the first direct

payment to ABN--$4,400,000.     The $4,400,000 was credited towards

ABN's specified return.    On December 5, 1991, AlliedSignal paid

ABN an additional $1,631,250, which also was calculated to pay a

portion of such return.    When the parties later determined that

ASA's income allocations, and AlliedSignal's direct payments, to

ABN had exceeded the specified return, AlliedSignal demanded and

received a $315,000 refund.     In sum, ABN was entitled to receive

only its specified return--no more and no less.
                               - 32 -


     The payment of the specified return violated the partnership

agreement provision that "no interest" was to be paid on capital

contributions.   The precise amount of this return could not be

determined until AlliedSignal and ABN knew ABN's actual interest

rate on the funds it advanced and how long such funds were held

in the partnership.   Petitioner concedes that the direct payments

to ABN depended on the amount of time ABN's funds were in ASA,

yet it asks this Court to conclude that the partnership provision

barring interest on capital contributions was adhered to.     We

decline to do so.   Cf. O'Hare v. Commissioner, 641 F.2d 83, 86

(2d Cir. 1981), (stating "It is hardly likely that a true owner

or joint venturer would agree to an arrangement whereby his

profit depended upon the timing of the sale rather than the

amount of the proceeds of the sale.     Such a payment mechanism

clearly suggests a fee for the use of credit * * *"), affg. T.C.

Memo. 1980-34.   The direct payments, and the income allocations,

to ABN were interest.    Cf. Deputy v. duPont, 308 U.S. 488, 498

(1940) (defining "interest" as compensation for the use or

forbearance of money).

     Citing Hunt v. Commissioner, T.C. Memo. 1990-248, petitioner

contends that even if ABN was entitled to a guaranteed return,

such return "is not inconsistent with partnership treatment".

Hunt, however, is distinguishable.      First, in Hunt, the

partnership agreement provided for the guaranteed return.     ABN's
                               - 33 -


specified return, however, was not provided in, and was contrary

to, AlliedSignal's and ABN's partnership agreement.    Second, in

Hunt, the partner receiving the guaranteed return was also

eligible to receive partnership profits in excess of such

partner's guaranteed return.    ABN, however, was only entitled to

its specified return and nothing more.    Cf. O'Hare v.

Commissioner, supra at 87 (stating that the taxpayer's failure

to share in any of the profits above his prearranged fee

militated against a finding that he was a joint venturer).

Therefore, Hunt v. Commissioner, supra, is inapplicable.

     B.   Loss Allocations

     The partnership agreement provided that losses would be

shared on a pro rata basis.    ABN, however, did not intend to, nor

did it actually, share in ASA's losses.

          1.   Loss on PPN Sale

     Prior to meeting AlliedSignal's representatives, Mr. den

Baas told other ABN officials that ABN would not bear any loss

relating to the PPN sale.    The Bermuda Agreement was consistent

with this representation.    ABN's April 11, 1990, internal

memorandum further confirms this agreement.    It states:   "Any

possible loss (for whatever reason) on the sale of the medium

term notes will be fully borne by Allied Signal."     The parties

ensured that AlliedSignal would bear such loss by embedding the

cost of the PPN sale in the value of the LIBOR notes (i.e., the
                               - 34 -


distribution of the LIBOR notes would result in a corresponding

decrease in AlliedSignal's capital account).

          2.   Loss on LIBOR Notes

     With respect to the LIBOR notes, the only ASA investment

with any significant potential to fluctuate in value, ABN

intended from the outset, and did, fully hedge its risk.      A

decline in interest rates, between the LIBOR notes acquisition

date and AlliedSignal's August 2 purchase, resulted in a

$6,342,068 decline in the LIBOR notes' value.    Consequently,

AlliedSignal paid $3,134,884 less to acquire Barber's and

Dominguito's partnership interests than it would have paid if

interest rates had remained constant.    This "loss", however, was

offset by ABN's swap income.   As Mr. den Baas testified, "as soon

as the hedge was in place, we didn't care anymore about the

principal risk of the LIBOR notes".     Moreover, when asked by the

Court about ABN's upside potential relating to the LIBOR notes,

Mr. den Baas explained that "we certainly took care that it would

never happen", because any increase in the value of the LIBOR

notes would be offset by losses from ABN's swap transactions.

     Petitioner contends that in determining whether ABN bore any

risk of loss relating to the LIBOR notes, the Court should not

consider swap transactions outside the partnership.    This

contention, however, is inconsistent with petitioner's assertion

that AlliedSignal's swaps were part of an "integrated investment
                                - 35 -


strategy, which must be analyzed as a whole".     Moreover, Merrill

Lynch pitched and AlliedSignal purchased this package deal as an

"integrated investment strategy" consisting of investments and

swaps.    ABN's swaps were part of this deal.   AlliedSignal was

fully aware that ABN, with assistance from the venture's

facilitator (i.e., Merrill Lynch) would hedge its risk in the

LIBOR notes.     All testimony to the contrary was not credible.

Accordingly, it is appropriate to consider both AlliedSignal's

and ABN's swap transactions.

            3.   Loss Arising From Debt Issuers' Bankruptcy

     Petitioner contends, and the partnership agreement provides,

that ABN bore the risk of "any ASA loss attributable to the

bankruptcy" of the commercial paper, PPN, and LIBOR note issuers.

The commercial paper, which constituted most of ASA's portfolio,

was AAA-rated, short-term, and from multiple issuers.     The PPNs

were issued by multiple AA-rated banks and held less than 30

days.     The LIBOR notes were issued by multiple AAA-rated banks

and held only 3 months.     Indeed, Mr. den Baas testified that ASA

held a "gorgeous portfolio" of assets and was "like a mini-bank"

because it had "its own portfolio" of multiple "stellar" credit

risks.     In sum, ABN's "risk" relating to these assets was de

minimis.

     C.     Expenses

     The partnership agreement implied that expenses would be
                               - 36 -


borne by the partners in accordance with their respective

interests.   Pursuant to the Bermuda Agreement, however,

AlliedSignal was obligated to, and did in fact, pay all of ASA's

expenses.    We also note that AlliedSignal's obligation to bear

expenses reduced AlliedSignal's return and undermined the stated

purpose of "obtaining a yield in excess of what they could obtain

from U.S. treasury securities".



     D.   Management

     The partnership agreement stated that the partners would

share in the management of ASA.    The agreement provided that

ASA's activities would require the "vote or consent" of partners

whose partnership percentages totaled at least 95 percent.     In

reality, however, AlliedSignal made all the critical decisions.

ABN was a compliant and accommodating party, which was chosen for

the venture because it was willing to serve at AlliedSignal's

direction.

     The management provision in the partnership agreement was

perfunctory, because the scheduled steps were prearranged by

Merrill Lynch and agreed to by AlliedSignal and ABN before they

executed the partnership agreement.     The distribution of the

LIBOR notes typifies how management responsibilities were

"shared".    Before the parties executed the partnership agreement,

AlliedSignal had already decided that the LIBOR notes would be
                                - 37 -


distributed to it.     While the minutes of the August 21, 1990,

meeting state that Dominguito's representative preferred cash

distributions and expressed concern about the "volatility of the

LIBOR notes", ABN had no such concern because it was fully

hedged.   The minutes were manufactured to give the impression

that ABN was playing an active management role when it was not.

From the outset of their relationship, ABN was fully aware that

the LIBOR notes would be distributed to AlliedSignal.

     E.   Conclusion

      The characteristics of AlliedSignal and ABN's relationship

are contrary to the characteristics of a bona fide partnership.

AlliedSignal and ABN had divergent, rather than common,

interests.   Moreover, they did not share in the venture's profit

and losses and did not comply with their partnership agreement

when it conflicted with the Bermuda Agreement.     AlliedSignal and

ABN knew that their conduct could jeopardize ASA's partnership

status, so they carefully avoided documenting their true intent.

In short, AlliedSignal, ASIC, and ABN's agents--Barber and

Dominguito--did not have the requisite intent to join together

for the purpose of carrying on a partnership and sharing in the

profits and losses therefrom.     Further analysis reveals that

AlliedSignal and ABN had a debtor-creditor relationship.

V.   Debtor-Creditor Relationship

      Whether parties are in a partnership or a debtor-creditor
                                - 38 -


relationship is a question of fact to be determined from all the

facts and circumstances.     Hambuechen v. Commissioner, 43 T.C. 90,

99 (1964); see Dixie Dairies Corp. v. Commissioner, 74 T.C. 476

(1980).   "The ultimate question [is] whether the investment,

analyzed in terms of its economic reality, constitutes risk

capital entirely subject to the fortunes of the corporate

venture" or represents a loan for which repayment was expected

regardless of the success of the venture.     Dixie Dairies Corp. v

Commissioner, supra at 494.     The conduct of AlliedSignal and ABN

confirms that they had a debtor-creditor relationship.

     A.   AlliedSignal

     AlliedSignal did not recruit the foreign partner.     Instead,

it accepted Merrill Lynch's package deal that included a

preselected partner.     It is both typical and rational for bona

fide partners to meet and negotiate prior to engaging in a $1

billion transaction involving numerous steps, complex swap

arrangements, and investments in sophisticated financial

instruments.   Yet, AlliedSignal's Executive Committee approved

the plan before it even knew the identity of the foreign partner.

The Board approved the plan 2 weeks after the venture began.

AlliedSignal, like a typical borrower, was only concerned that a

strong, reputable bank was financing the transaction.     The

identity of the bank was irrelevant.

     AlliedSignal spent a considerable amount of time ensuring
                               - 39 -


that ABN received its specified return and was preoccupied with

determining the amount of, and the labels attached to, the direct

payments to ABN.    Petitioner contends that there was no

assurance, commitment, or binding agreement to pay ABN a

specified return.    AlliedSignal, however, scrupulously calculated

the shortfall between Barber's and Dominguito's income

allocations and ABN's specified return and recorded this

shortfall as an accrued liability for financial purposes.

AlliedSignal wanted to ensure that its direct payments, and ASA's

income allocations, to ABN were being properly credited toward

AlliedSignal's obligation to pay ABN's specified return.      In

essence, AlliedSignal's conduct resembled that of a meticulous

borrower rather than a partner.



     B.   ABN

     From the outset of the venture, ABN processed the ASA

transaction just like any other large corporate loan.       For loans

more than $25 million, ABN required approval from its North

American Credit Committee, Foreign Credit Department, and

headquarters.   Accordingly, ABN New York submitted the loan

application relating to the plan, and ABN approved the loan,

through the aforementioned channels.    Although ABN was,

ostensibly, considering a loan to Barber and Dominguito, it

evaluated and approved the loan based on AlliedSignal's financial
                               - 40 -


statements.   In addition, the ABN loan-approval committees

authorized the loan only after they were assured that the loan

contained terms and degrees of risk commensurate with loans that

it ordinarily makes.

     ABN, like most prudent lenders, attempted to insulate itself

from credit risk by establishing certain safeguards.   It insisted

that most of ASA's investments be in high-grade, low-risk, short-

term notes.   In addition, by lending the funds through Barber and

Dominguito, rather than directly to AlliedSignal, ABN established

a direct interest in, what Mr. den Baas characterized as, a

"gorgeous portfolio" of AAA-rated, diversified, high-grade

assets, rather than a $990 million loan to a single A-rated

company.   Furthermore, ABN had collateral for the funds it

transferred to ASA, because ASA's commercial paper was physically

kept in ABN's vault and ASA's other investments were maintained

in a custody account at ABN New York.

     ABN merely sought its specified return.   This return was

equivalent to interest and was guaranteed by AlliedSignal.    The

parties agreed that ABN would be repaid according to a specified

schedule, which established fixed maturity dates when ABN was to

be repaid (i.e., August 1990, March 1991, and full repayment by

May 1992).    If AlliedSignal missed a payment date, it compensated

ABN for the prolonged period (e.g., the December 5, 1991, payment

of $231,250 of interest because ASA partially redeemed ABN's
                              - 41 -


interest in November, rather than March, of 1991).    In addition,

by engaging in swap transactions, ABN restricted its ability to

earn "a rate of return in excess of the rate available on direct

investments in the securities which the Partnership plans to

purchase".   Mr. den Baas testified that ABN did not want to

gamble on interest rates and that its swaps were designed to

prevent ABN from sharing in profits or losses from the LIBOR

notes--the ASA asset with the most profit potential.

     We must look to the substance of the transactions rather

than the form.   Hambuechen v. Commissioner, supra at 98; see

Gregory v. Helvering, 293 U.S. 465 (1935).    When the formalities

are stripped away, ABN is in substance a lender.     Accordingly, we

hold that Barber and Dominguito were not partners in ASA and that

the appropriate amount of gain relating to the sale of the PPNs

and loss relating to the sale of the LIBOR notes shall be

allocated between AlliedSignal and ASIC.

     All contentions that have not been addressed are either

irrelevant, moot, or meritless.

     To reflect the foregoing,



                                           Decision will be entered

                                    under Rule 155.
