                           117 T.C. No. 27



                     UNITED STATES TAX COURT



NICOLE ROSE CORP., FORMERLY QUINTRON CORPORATION, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3328-00.             Filed December 28, 2001.



          Held: Approximately $22 million in claimed
     ordinary business expense deductions are disallowed
     because they relate to transactions lacking in business
     purpose and in economic substance.



     Stanley C. Ruchelman, Harold L. Adrion, and Sandra Gale

Behrle, for petitioner.

     Lewis R. Mandel and Andrew J. Mandell, for respondent.
                                - 2 -

     SWIFT, Judge:   For petitioner’s taxable years ending

January 31, 1992, 1993, and 1994, respondent determined

deficiencies in petitioner’s Federal income taxes and accuracy-

related penalties as follows:


                                  Accuracy-Related Penalty
       Year    Deficiency               Sec. 6662(a)
       1992    $1,171,365                 $234,273
       1993       684,700                  136,940
       1994     4,559,237                  911,847


     Unless otherwise indicated, all section references are to

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

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     The primary issue for decision is whether the transfer of

petitioner’s interests in multilayered leases of computer

equipment and related trusts had business purpose and economic

substance and should be recognized for Federal income tax

purposes and whether petitioner should be entitled to the

$22 million in claimed ordinary business expense deductions

relating thereto.


                         FINDINGS OF FACT

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

     At the time the petition was filed, petitioner’s principal

place of business was located in Jericho, New York.
                                - 3 -

     In 1992, Quintron Corp. (Quintron), a Virginia corporation,

entered into negotiations with Loral Aerospace Corp. (Loral), a

Delaware corporation, for the sale to Loral of Quintron stock or

for the sale to Loral of Quintron’s assets.

     Quintron was engaged in the design, manufacture, sale, and

service of aircraft flight simulators and other electronic

equipment.   Loral was a major defense contractor and was engaged

in the design, manufacture, sale, and service of communications

and satellite equipment.

     Representatives of Quintron wanted Loral to purchase from

Quintron’s shareholders their stock in Quintron.   Representatives

of Loral wanted Loral to purchase the assets of Quintron.

     In 1993, representatives of Intercontinental Pacific Group,

Inc. (IPG), a California corporation and the parent corporation

of QTN Acquisition, Inc. (QTN), suggested that, with IPG’s and

QTN’s participation as a type of intermediary or facilitator in

the transaction, the stock in Quintron could be sold, and Loral

could purchase Quintron’s assets.   The controlling shareholder of

IPG was Douglas Wolf (Wolf).1

     After further negotiations, in September of 1993, QTN, until

that point in time a dormant shell corporation and a subsidiary

of IPG, purchased from the shareholders of Quintron for

$23,369,125 in cash their stock in Quintron.   QTN financed this

stock purchase through a bank loan.




1
     Wolf was a lawyer and organized IPG to purchase and sell
leased equipment.
                               - 4 -

     Upon purchase of the stock in Quintron, QTN was merged into

Quintron, and Quintron thereafter remained as the surviving

corporation and was controlled by IPG.2   A major benefit to IPG

and to QTN of retaining Quintron as the surviving corporation

after the merger between Quintron and QTN was that Quintron had

significant taxable income in 1993 and prior years against which

claimed carryback losses (arising from the claimed ordinary

deductions relating to the transactions at issue herein) could be

applied in an attempt to produce large tax refunds for the

successor corporation to Quintron (and even though, as stated,

QTN in prior years had been a dormant shell corporation).

     By prearrangement and simultaneously with the above stock

purchase transaction, Quintron (the stock of which was now

controlled by IPG) sold to Loral the assets of Quintron.3

Quintron’s sale price for the assets was approximately $20.5

million in cash, plus the assumption by Loral of certain

liabilities of Quintron.   Expenses of $892,943 were incurred by

QTN and Quintron in connection with the stock purchase and asset

sale transactions.

     In spite of the transactions involving the purchase of its

stock by QTN, QTN’s merger with Quintron, and the sale of assets



2
     After the merger of QTN into Quintron, IPG owned directly or
indirectly more than 75 percent of the stock in Quintron.
3
     The parties do not explain why the only assets of Quintron
that were sold to Loral consisted of $4.6 million in goodwill,
$16.5 million in trade receivables, and $85,000 in other assets.
Presumably, Quintron had operating assets that were the basis of
Quintron’s manufacturing and sales business. What happened to
such operating assets is not explained in the record.
                               - 5 -

to Loral, and in spite of Quintron’s name change on October 27,

1993, to “Nicole Rose Corp.”, for convenience generally

hereinafter we refer to Quintron as “petitioner”.

     The $20.5 million received on the sale of assets to Loral

was used by petitioner to pay off most of the bank loan obtained

to purchase the stock in Quintron.

     Upon the sale of assets to Loral (due to petitioner’s low

carryover tax bases in the assets) petitioner would be required

to recognize on its 1994 Federal income tax return approximately

$11 million in income.4

     The above $11 million in income that petitioner would have

to report on its 1994 Federal income tax return (relating to

petitioner’s sale of assets) explains the transactions that were

entered into in order to produce the claimed $22 million in

ordinary Federal income tax deductions that are at issue herein.

Petitioner, QTN, IPG, other entities controlled by Wolf, and

other domestic and foreign entities, planned and participated in

a series of complicated, tax-oriented transactions involving the

establishment and transfer of petitioner’s interests in certain

leases of computer equipment and related trusts.

      We first explain the background and history relating to the

leased equipment.   We then seek to explain the complicated tax-

oriented maneuvers that petitioner and others entered into in




4
     Because the stock in Quintron was purchased by QTN, followed
by QTN’s merger into Quintron, Quintron’s tax bases in the assets
were not, prior to the sale to Loral, adjusted to fair market
value.
                                 - 6 -

order to produce the claimed $22 million tax deductions relating

thereto.


Background Relating to Leases5

     In 1990, N.V. Brussels Airport Terminal Co. (Brussels

Airport), a Belgium corporation which financed, developed, and

managed the Brussels, Belgium, airport, purchased from ABN AMRO

Bank, N.V. (ABN), a commercial Dutch bank, certain computer

equipment and leased the equipment back to ABN, which was the end

user of the equipment.   Brussels Airport financed the purchase of


5
     Also in 1990 and later years, in addition to the series of
computer equipment leasing transactions, transfers, and payments
into trust (relating to what we refer to generally as the
Brussels Airport package of leased equipment) that are
specifically described in our findings of fact, two other series
of transactions were entered into involving petitioner, entities
controlled by IPG, other domestic entities, and two foreign
entities (namely, N.V. Reilly Chemicals S.A. (Reilly) and
Reibelco S.A. (Reibelco)), that also involved computer equipment
leasing transactions, transfers, and payments into trusts, and
that generated large ordinary tax deductions claimed by
petitioner, that were disallowed by respondent, and that are at
issue herein.

     At the time of trial, however, none of the documentation
relating to the Reilly and to the Reibelco transactions could be
located by petitioner. Because the nature and purpose of the
Reilly and Reibelco transactions (for which no documentation is
available) are, in all relevant respects, similar to the
transactions involving the Brussels Airport leased equipment
described in our findings of fact (for which documentation is
available), petitioner and respondent have stipulated that the
resolution of the claimed tax deductions in issue relating to the
Brussels Airport leased equipment will also control the
resolution of the tax issues relating to the Reilly and Reibelco
transactions. In order properly to reflect the amounts involved
that are the basis for petitioner’s claimed $22 million tax
deductions, in our findings and opinion we generally use dollar
amounts that reflect cumulative numbers and cumulative dollar
amounts for the three series of transactions (i.e., our findings
and opinion generally reflect cumulative dollar amounts for the
combined Brussels Airport, Reilly, and Reibelco transactions).
                                - 7 -

the equipment with a loan from Pierson, Heldring & Pierson N.V.

(Pierson), a subsidiary of ABN (Pierson loan).

     The initial term of the leaseback of the equipment from

Brussels Airport to ABN (the Brussels Leaseback) extended from

December 28, 1990, to December 31, 1997.   Under the Brussels

Leaseback, ABN had the option to extend the Brussels Leaseback

for up to 3 additional years.

     Because of similarities in the amounts due under the

Brussels Leaseback and the Pierson loan, ABN was to make lease

payments due under the Brussels Leaseback directly to Pierson,

and the lease payments were then to be applied by Pierson in

satisfaction of the payments due on the Pierson loan.

     One year later, on December 12, 1991, ABN assigned to Atrium

Finis (Atrium), an equipment leasing and financing partnership

organized under the laws of the United Kingdom, all of its

interest as lessee under the remaining 6-year term of the 7-year

Brussels Leaseback.   ABN, however, simultaneously leased back

from Atrium for approximately 3 years, until December 31, 1994,

use of the equipment covered by the Brussels Leaseback, and ABN

retained an option to extend this leaseback for an additional 4

years, until December 31, 1998 (the Atrium Sublease).

     On December 12, 1991, ABN prepaid to Atrium approximately

$25 million, reflecting generally lease payments scheduled to be

paid to Atrium by ABN over the course of the 3-year Atrium
                               - 8 -

Sublease.   This $25 million (taking into account the time value

of money) apparently corresponded generally to approximately 90

percent of the total lease payments to be paid during the

remaining 6-year term of the Brussels Leaseback.

     By prearrangement, with receipt from ABN of the $25 million

in prepaid lease payments, the $25 million was transferred into a

trust fund (the Trust Fund) to secure Pierson’s right to receive

the lease payments due under the remaining 6-year term of the

Brussels Leaseback.

     Under the December 12, 1991, assignment to Atrium of ABN’s

interest in the Brussels Leaseback, even though Pierson was

secured for the lease payments due from Atrium under the Brussels

Leaseback, Atrium was stated to be nominally obligated on the

lease payments due thereunder (which as stated were to be paid

directly to Pierson as lender).   Pierson, however, had no

recourse to Atrium on the Pierson loan.   Pierson’s recourse

thereon was limited to the equipment covered by the Brussels

Leaseback and to the $25 million that was transferred into the

Trust Fund.

     As creditor on Brussels Airport’s purchase of the equipment

from ABN and as the entity to whom the ABN end-user lease

payments ultimately were due to be paid under the Brussels

Leaseback, the beneficiary of the Trust Fund was Pierson.    Even

though Pierson, however, was the beneficiary of the Trust Fund
                              - 9 -

and was to receive distributions from the $25 million Trust Fund

over the course of the remaining term of the Brussels Leaseback,

Pierson also was the trustee of the Trust Fund, and, as such,

from the December 12, 1991, date on which the funds were

transferred into the Trust Fund, Pierson had possession of the

$25 million.

     Under the terms of the Trust Fund, in 1995, 1996, and 1997

Atrium was required to make additional payments into the Trust

Fund of approximately $1.6 million relating to the remaining 10

percent of the total payments to be paid during the remaining 6-

year term of the Brussels Leaseback.


Residual Value Certificate, Transfer of Interest in the
Trust Fund, and Cancellation of Petitioner’s Lease Interest

     From March of 1993 through September of 1993, ABN, Atrium,

Wolf on behalf of QTN and petitioner, and other parties

negotiated a modification or a restructuring to some of the terms

relating to the payments due under the Brussels Leaseback, under

the Atrium Sublease, and under the Trust Fund.   The additional

$1.6 million that Atrium, in later years, would have been

required to pay under the Trust Fund was reduced to $400,000.

ABN effectively obligated itself to continue leasing the

equipment during the 4-year renewal period of the Atrium

Sublease, and the scheduled lease payments to be due from ABN

during the 4-year period were restructured.
                              - 10 -

     As restructured as of September 30, 1993, the lease payments

to be paid to Atrium during the 4-year renewal period were set

forth and described in what was referred to as a residual value

certificate (RVC).   Under the terms of the RVC, ABN would be

required to pay Atrium, on November 30, 1996, and on November 30,

1998, an unspecified amount equal to 200 percent of the fair

market value of the leased equipment, as of the two respective

payment due dates, in excess of specified base amounts of $5

million on the first date and $2 million on the second date.    In

other words, if the fair market value of the leased equipment as

of the specified dates did not exceed the stated base amounts for

the equipment, no payments would be due from ABN under the RVC.

Also, under the terms of the RVC, ABN expressly disclaimed any

warranty or representation regarding the present or future value

of the equipment.

     In connection with ABN’s, Atrium’s, and ultimately

petitioner’s participation and acceptance of the terms of the

RVC, no appraisal was obtained of the fair market value of the

leased equipment as of September 30, 1993, and ABN, Atrium, and

petitioner relied on an incomplete and outdated appraisal of the

leased equipment made in 1991.   No credible effort was made to

establish, as of September of 1993, that the base amounts

specified in the RVC were reasonable and that the RVC had any

foreseeable value.
                              - 11 -

     On September 30, 1993 (through a series of section 351

transfers involving a number of entities related to and

controlled generally by Wolf and through which Atrium ultimately

received stock in a corporation related to petitioner),6 Atrium

transferred to petitioner Atrium’s remaining interests and

obligations relating to the underlying Brussels Leaseback, the

Atrium Sublease, and the Trust Fund.   The interests transferred

to petitioner included the potential right to receive the

unspecified payments from ABN under the RVC and the stated

obligation to make the restructured additional $400,000 payment

into the Trust Fund.   This transfer to petitioner was the first,

direct step in the plan to generate the multi-million dollar

ordinary tax deductions that petitioner sought to use as an

offset against, among other income, the $11 million that

petitioner would be required to recognize on its 1994 U.S.

Corporation Income Tax Return (Form 1120) as a result of the sale

to Loral of Quintron’s assets.

     As the second, direct, prearranged step in the plan to

generate for petitioner the above-referenced multi-million dollar

tax deduction, also on September 30, 1993, simultaneously with

petitioner’s receipt from Atrium of the above interests relating


6
     For convenience, we do not specifically identify each and
every entity related to and generally controlled by Wolf which
participated in the various transactions involving the transfer
of the leases and the interest in the Trust Fund.
                              - 12 -

to the Brussels Leaseback, the Atrium Sublease, and the Trust

Fund, petitioner transferred to B.V. Handelsmaatschappij

Wildervank (Wildervank), a Dutch bank based in the Netherlands,

petitioner’s interests in the Brussels Leaseback and in the Trust

Fund, $400,000 in cash, and 10 shares of stock in Cove

Enterprises, Inc. (Cove), an unrelated corporation.   Petitioner’s

interest in the RVC was not transferred to Wildervank and was

retained by petitioner.

     In exchange for the above transfers to Wildervank,

Wildervank assumed all of petitioner’s purported lease

obligations relating to the Brussels Leaseback and the Trust

Fund.

     On September 30, 1993, the balance of the funds held in

trust by the Trust Fund was approximately $22 million.

     On or about November 30, 1996, ABN informed petitioner that

no payment would be made to petitioner under the RVC.     Petitioner

made no effort to establish the value of the leased equipment or

otherwise to question why no payment would be made to it under

the RVC.   On October 1, 1997, petitioner was liquidated and went

out of business.

     On its 1994 Federal corporation income tax return

(reflecting a taxable year ending January 31, 1994), petitioner

reported income in the amount of approximately $11 million

relating to the sale of assets to Loral, and petitioner claimed
                             - 13 -

an ordinary business expense deduction of $400,000 relating to

the transfer to Wildervank of $400,000 in cash, a capital loss of

$2,118,644 relating to the transfer to Wildervank of the 10

shares of Cove common stock, and an ordinary business expense

deduction of $21,840,660 relating to the transfer to Wildervank

of its interests in the Brussels Leaseback and in the Trust

Fund.7

     Petitioner’s approximate $22 million claimed ordinary

business expense deductions offset the $11 million in income that

petitioner was required to report on the sale of assets to Loral

and also resulted in petitioner’s reporting for 1994 a claimed

net operating loss of $8,953,708.   Petitioner elected to carry

back from 1994 to 1992 and to 1993 the $8,953,708 claimed net

operating loss to offset Quintron’s reported income for those

years, and based thereon respondent issued refunds to petitioner

for 1992 and 1993 in the respective amounts of $1,172,448 and

$684,705.

     In respondent’s notice of deficiency to petitioner for 1992,

1993, and 1994, respondent disallowed petitioner’s claimed

$400,000 and $21,840,660 ordinary business expense deductions

relating to the above transactions petitioner claimed on its 1994


7
    Petitioner’s tax return preparer, Howard B. Teig, C.P.A.,
received $39,940 for his involvement in the above transactions
and for his preparation of petitioner’s 1994 Federal income tax
return.
                              - 14 -

Federal income tax return, and respondent disallowed petitioner’s

$8,953,708 claimed net operating loss carryback deduction to 1992

and to 1993.   Respondent did not disallow the $2,118,644 claimed

capital loss relating to petitioner’s transfer to Wildervank of

the Cove common stock.


                              OPINION

     Taxpayers have a legal right to structure transactions to

minimize their tax obligations.   Gregory v. Helvering, 293 U.S.

465, 469 (1935).   A transaction, however, entered into solely for

tax avoidance without economic, commercial, or legal effect other

than expected tax benefits constitutes an economic sham without

effect for Federal income tax purposes.   Frank Lyon Co. v. United

States, 435 U.S. 561, 573 (1978); Gilman v. Commissioner, 933

F.2d 143, 147-148 (2d Cir. 1991), affg. T.C. Memo. 1990-205;

Rice’s Toyota World, Inc. v. Commissioner, 81 T.C. 184, 196

(1983), affd. in part and revd. in part 752 F.2d 89 (4th Cir.

1985).

     Whether we respect a taxpayer’s characterization of a

transaction depends upon whether the characterization represents

and is supported by a bona fide transaction with economic

substance, compelled or encouraged by business or regulatory

realities, and not shaped solely or primarily by tax avoidance

features that have meaningless labels attached.   Frank Lyon Co.
                               - 15 -

v. United States, supra at 583-584; Winn-Dixie Stores, Inc. v.

Commissioner, 254 F.3d 1313, 1316 (11th Cir. 2001), affg. 113

T.C. 254 (1999); UPS of Am., Inc. v. Commissioner, 254 F.3d 1014,

1018-1020 (11th Cir. 2001), revg. T.C. Memo. 1999-268; ACM Pship.

v. Commissioner, 157 F.3d 231, 247 (3d Cir. 1998), affg. in part,

revg. in part, dismissing in part, and remanding T.C. Memo. 1997-

115.

       Our inquiry as to whether a transaction has sufficient

economic substance to be recognized for Federal income tax

purposes turns on the subjective business purpose and on the

objective economic substance of the transaction.      Kirchman v.

Commissioner, 862 F.2d 1486, 1490-1492 (11th Cir. 1989), affg.

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

       In UPS of Am., Inc. v. Commissioner, T.C. Memo. 1999-268, we

held that the restructure of certain insurance premiums lacked

business purpose and economic substance and should be disregarded

for Federal income tax purposes.     On appeal, the Court of Appeals

for the Eleventh Circuit reversed.      UPS of Am., Inc. v.

Commissioner, 254 F.3d 1014 (11th Cir. 2001).     In the context of

an ongoing, viable business, the Court of Appeals articulated

“business purpose” broadly, as follows:


       a transaction has a “business purpose,” when we are
       talking about a going concern like UPS, as long as it
       figures in a bona fide, profit-seeking business. * * *
       [Id. at 1019.]
                              - 16 -

     Under any version of the business purpose and economic

substance test, the transactions before us must be regarded as

lacking in business purpose and economic substance.

Additionally, we note that, prior to the September 1993

transactions, QTN was a dormant shell corporation, controlled by

Wolf, not a going concern.

     Petitioner contends that it is entitled to the $22 million

claimed ordinary business expense deductions relating to its

transfer to Wildervank of its interest in the Trust Fund and the

$400,000 in cash.   Petitioner’s apparent theory of deductibility

is that the value of petitioner’s interest in the Trust Fund was

equal to the $21.8 million balance in the Trust Fund and

therefore that when petitioner transferred to Wildervank its

interest in the Trust Fund, plus the $400,000 in cash, the

transfer should be treated as a “payment” by petitioner to

Wildervank of $22 million in exchange for the cancellation of

petitioner’s obligation on an onerous lease.   In support,

petitioner cites case authority and respondent’s rulings for the

proposition that payments extinguishing lease obligations may

qualify as ordinary and necessary business expense deductions.

Hort v. Commissioner, 313 U.S. 28, 32 (1941); Stuart Co. v.

Commissioner, 195 F.2d 176, 177 (9th Cir. 1952), affg. a

Memorandum Opinion of this Court; Helvering v. Cmty. Bond &

Mortgage Corp., 74 F.2d 727, 728 (2d Cir. 1935), affg. 27 B.T.A.
                             - 17 -

480 (1932); Rev. Rul. 69-511, 1969-2 C.B. 23; Rev. Rul. 68-112,

1968-1 C.B. 62.

     Petitioner claims that the RVC it received and retained had

significant value, that petitioner had the opportunity to realize

significant profit from the RVC, and that this profit potential

explains and supports petitioner’s participation in a legitimate

for-profit transaction.

     Respondent claims that the transfer to Wildervank of

petitioner’s interests in the Brussels Leaseback, in the Trust

Fund, and in the $400,000 in cash, in exchange for Wildervank’s

assumption of petitioner’s obligations relating to the Brussels

Leaseback and the Trust Fund lacked business purpose and economic

substance and should be disregarded.   We agree with respondent.

     The record establishes that no credible business purpose and

that no viable economic substance existed for the transfer to

Wildervank of petitioner’s interests in the Brussels Leaseback,

in the Trust Fund, and in the $400,000 in cash.   The complicated

nature of these transactions fails to mask the lack of business

purpose and economic substance in key aspects of the transactions

and the tax avoidance objectives thereof.

     In September of 1993, when it participated in these

transactions, petitioner never had any genuine obligation with

respect to the Brussels Leaseback and the Trust Fund.   Even

petitioner’s payment of the $400,000 in cash we regard as not
                             - 18 -

supported by a valid business purpose and economic substance.

That payment is tainted by petitioner’s sole tax motivation for

participating in these transactions.

     Petitioner’s only purpose for transferring to Wildervank its

interests in the Brussels Leaseback and in the Trust Fund was to

create the claimed tax deductions.    As respondent’s expert

testified at trial, independent of the production of claimed tax

deductions, there was no purpose to, and no substance for, the

transfer to Wildervank of petitioner’s interests in the Brussels

Leaseback and in the Trust Fund.

     As respondent’s expert testified, the RVC had no value.      In

fact, due to incomplete information, a significant portion of the

underlying equipment to which the RVC related was not capable of

being valued.

     The testimony at trial and the report of the expert who was

used in late 1990 and early 1991, at the time of the original

Brussels Leaseback, were significantly inadequate.    The expert

and his report reflect incomplete information on the type of

equipment, the manufacturer of the equipment, the extent of the

equipment, the model of the equipment, and the original market

introduction date of the equipment.    In his calculations, the

expert used a beginning life for the equipment that corresponded

with the 1991 Brussels Leaseback, even though the expert knew

that the type of equipment involved in the leaseback had been
                             - 19 -

introduced into the market a number of years prior thereto.    The

expert utilized the same methodology for valuation that he used

and that we specifically rejected in Smoot v. Commissioner, T.C.

Memo. 1991-268.

     Although we criticize petitioner’s expert witness, who also

was used in 1990 and 1991 in connection with the Brussels

Leaseback, we do not suggest any lack of business purpose or

economic substance in the Brussels Leaseback, the Atrium

Sublease, or the Trust Fund, about which we have inadequate

information, which involved generally non-U.S. taxpayers, and

with respect to which no U.S. tax issue has been raised.    Our

focus, our findings, and our conclusions relate to petitioner’s

interest in, and the transfer of its interest in, the Trust Fund

and in the value of the RVC, and whether a business purpose and

economic substance were associated with petitioner’s

participation in these specific latter transactions.

     The report and the testimony of petitioner’s trial expert

witness (in addition to relying on and perpetuating errors made

by petitioner’s first expert witness) were riddled with

additional significant errors and inaccuracies.   Many items of

equipment were omitted from his report, and values were used for

some of the equipment that was included in his report that were

higher than the original cost figures for the equipment.

Petitioner’s experts were not credible.
                             - 20 -

     Petitioner’s actions, or lack thereof, corroborate that

petitioner never regarded the RVC as having any value.   In 1993,

prior to receiving the RVC, petitioner never obtained an

independent appraisal of the equipment, and in 1997, when

petitioner was notified that a payment would not be made under

the RVC, petitioner did nothing to establish the value of the

equipment and to verify that under the RVC petitioner had no

right to receive a payment from ABN.

     The various transfers prior to 1993 relating to the Brussels

Leaseback, the Atrium Sublease, and the Trust Fund created

essentially a circular flow of funds with the net result that,

once the $25 million was transferred into the Trust Fund by ABN,

Pierson was obligated to pay itself.   Pierson’s only recourse for

the payments under the Brussels Leaseback was from the equipment

and from the funds held in the Trust Fund.   Because the $25

million transferred into the Trust Fund represented security for

Pierson as lender on the Brussels Leaseback and because of

Pierson’s status as trustee on and as beneficiary of the Trust

Fund, petitioner had no legitimate interest of value in the Trust

Fund and no legitimate obligations associated therewith.

     Petitioner’s claimed $22 million tax deductions relating to

interests held for less than a day in the Brussels Leaseback and

in the Trust Fund constitute merely a tax ploy, a sham, without

business purpose and without economic substance.
                              - 21 -

     Petitioner’s case and ruling authority involving the tax

treatment of payments to cancel legitimate and economically

viable lease obligations are not applicable.

     Further, from petitioner’s perspective, no nontax profit

potential was associated with petitioner’s role as facilitator in

connection with the purchase of the Quintron stock and the sale

of assets to Loral.   As a result thereof (due only to the low tax

bases in the assets), petitioner was required to report more than

$11 million in paper taxable income.   Petitioner paid $23,369,125

for the stock of Quintron and then sold to Loral the assets of

Quintron for $20,576,754 (retaining five accounts receivable with

a balance of $2,997,364).   Assuming the retained accounts

receivable were fully collected by petitioner, producing a gross

profit of $204,992 on the prearranged and simultaneous stock

purchase and asset sale transactions, petitioner’s $892,943 in

expenses more than consumed any gross profit.

     Petitioner’s participation in the purchase of Quintron stock

and in the asset sale to Loral is explained by petitioner’s

manufacture of the $22 million claimed tax deductions which, if

allowed, would effectively offset the tax cost associated with

petitioner’s sale of assets and which would produce to petitioner

refunds of $1,857,153 in taxes Quintron (not petitioner) had paid

in prior years.   Again, from petitioner’s perspective, claimed
                              - 22 -

tax benefits provide the only credible explanation for

petitioner’s participation.

     The evidence is clear that petitioner had no valid business

purpose for the transfer to Wildervank of its interests in the

Trust Fund and in the Brussels Leaseback and for the transfer to

Wildervank of the $400,000 in cash.    Other than claimed tax

benefits, petitioner received nothing of value.    The transactions

lacked business purpose and economic substance, and the

transactions are to be disregarded for Federal income tax

purposes.

     Petitioner argues that because of a shift in respondent’s

argument, the burden of proof should be shifted to respondent.

Rule 142.   Our findings and conclusions herein are based on the

evidence and are made without reliance on the burden of proof.

     Other arguments made by petitioner have been considered and

are without merit.

     Section 6662 imposes a penalty of 20 percent on

underpayments of tax attributable to negligence or to disregard

of the rules or the regulations.   For purposes of section

6662(a), negligence constitutes a failure to make a reasonable

attempt to comply with the Internal Revenue Code.    Sec. 6662(c).

     The accuracy-related penalty under section 6662(a) will not

apply to any part of petitioner’s underpayments of tax if, with

regard to that part of the underpayments, petitioner establishes
                              - 23 -

reasonable cause and if petitioner acted in good faith.    Sec.

6664(c).

     The participation of highly paid professionals provides

petitioner no protection, excuse, justification, or immunity from

the penalties in issue.   Petitioner participated in a clear and

obvious scheme to reap the benefits of claimed ordinary business

expense deductions that had no business purpose and no economic

substance.   The facts and circumstances of this case reflect no

reasonable cause and no good faith for petitioner’s participation

in the transactions before us.

     Petitioner is liable for the accuracy-related penalties

under section 6662(a).

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.
