                          T.C. Memo. 1999-349



                      UNITED STATES TAX COURT



           RONALD AND BARBARA KIMMICH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 994-90.                     Filed October 21, 1999.



     David A. Carris, for petitioners.

     Timothy S. Sinnott, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined deficiencies in, and

additions to, petitioners' Federal income taxes, as follows:
                                          - 2 -

                                                                                      Increased
                                             Additions to Tax                           Interest

Year    Deficiencies    Sec. 6653(a)(1)   Sec. 6653(a)(2)   Sec. 6659    Sec. 6661    Sec.
6621(c)
                                                1                           2                3
1982    $38,858.88        $1,942.94                         $10,118.45
                                                1                           2                3
1983     26,826.77         1,341.34                           8,048.03
                                                1                           2                3
1984     40,618.76         2,030.94                          12,185.63
  1
   50 percent of the    interest due on the entire deficiency.
  2
   25 percent of the    understatement of tax (determined alternatively to the
additions under sec.    6659).
  3
    Interest computed   at 120 percent of the normal rate.

  Respondent concedes that petitioners are not liable for additions

  to tax under sections 6653, 6659, and 6661 of the Internal

  Revenue Code.1        Respondent, however, continues to assert that

  petitioners are liable for increased interest under section

  6621(c).

         The issues we must decide in the instant case are:                     (1)

  Whether Ronald Kimmich (petitioner) is "at risk" with respect to

  debt incurred as part of a computer leasing transaction that he

  entered into during 1982; and (2) whether petitioners are liable

  for increased interest on tax underpayments attributable to tax-

  motivated transactions under section 6621(c) for each of the tax

  years in issue.




  1
       Unless otherwise noted, 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.
                                 - 3 -


                           FINDINGS OF FACT

     The parties submitted the instant case fully stipulated.

The parties' stipulation of facts is incorporated herein by

reference and these stipulated facts are found as facts in the

instant case.     Petitioners resided in Gibsonia, Pennsylvania,

when they filed their petition.

     During the years in issue, Elmco Inc. (Elmco) was a Maryland

corporation offering equipment leasing transactions to investors.

Greyhound Capital Corp. (GCC), a New York corporation, was in the

business of leasing and marketing computers and related

equipment.   On December 22, 1982, Elmco purchased computer

equipment from GCC that it later sold to petitioner.     A

promissory note, dated December 22, 1982, required Elmco to first

pay GCC $830 per month for 36 months, then $11,716.70 per month

for 72 months.2    All monthly payments accrued in arrears and were

paid quarterly on the first day of April, July, October, and

January.   Additionally, on December 31, 1982, Elmco was required

to pay GCC $1,240.71, which payment constituted interest through

December 31, 1982.

     Also, on December 22, 1982, petitioner entered into a

"Purchase Agreement" with Elmco to purchase the same computer




2
     Neither party introduced evidence of the recourse or
nonrecourse nature of this note.
                               - 4 -


equipment that Elmco purchased from GCC.3   Petitioner agreed to

pay $500,000 as follows:   $18,500 cash; delivery of three "Equity

Promissory Notes" totaling $82,700 bearing 12.5 percent per annum

interest, and execution of a $398,800 long-term "Buyer

Acquisition Note" bearing 14 percent per annum interest.4    The

three Equity Promissory Notes were negotiable and fully recourse.

The Buyer Acquisition Note was payable as follows:   $830.00 per

month for the first 36 months, then $11,716.70 per month for 72

months.   All monthly payments accrued in arrears and were paid

quarterly on the first day of April, July, October, and January.

The payment schedule mirrored exactly Elmco's payment schedule

under its note to GCC.   Petitioner also agreed to pay Elmco an

additional $1,240.71 on December 31, 1982, which amount

constituted interest up to that date.

     The Purchase Agreement provided that petitioner would lease

the computer equipment to GCC and enter a remarketing agreement

with GCC as of the date of purchase.    Pursuant to a December 22,

1982, "Security Agreement", petitioner granted Elmco a security

interest in the computer equipment, the GCC lease, and the

underlying end-user leases.   The security interest, however, was


3
     Petitioner owned of all the equipment involved in the
transaction for all purposes.
4
     The parties agree that petitioner is at risk with respect to
the Equity Promissory Notes as well as the $18,500 cash payment.
                                - 5 -


subordinate to GCC's lease rights and the rights of the

underlying end-user lessees.5   Petitioner's purchase of the

equipment was subject only to the underlying lessees' rights and

Elmco's rights under the Security Agreement.   Also, on December

22, 1982, Elmco, pursuant to the "Collateral Assignment",

assigned its rights in petitioner's three Equity Promissory Notes

and the Buyer Acquisition Note to GCC.6




5
     The Lease Agreement between GCC and petitioner contained the
following legend:

     THIS LEASE AGREEMENT HAS BEEN ASSIGNED BY, AND IS
     SUBJECT TO, A SECURITY INTEREST GRANTED BY, LESSOR
     [Petitioner] TO SELLER [Elmco] PURSUANT TO A SECURITY
     AGREEMENT DATED AS OF DECEMBER 22, 1982, AND TO A
     SECURITY INTEREST GRANTED BY SELLER [Elmco] TO LESSEE
     [GCC] PURSUANT TO A COLLATERAL ASSIGNMENT AGREEMENT
     DATED AS OF DECEMBER 22, 1982 BETWEEN LESSEE [GCC] AND
     SELLER [Elmco].
6
     The Collateral Assignment provided that Elmco's assignment
of its rights in the collateral to GCC was limited as follows:

          3. Security Interest Only. The rights to the
     Collateral granted to the Secured Party [GCC] hereunder
     shall constitute a security interest only. The Secured
     Party shall not proceed against any of the Collateral, or
     collect the proceeds therefrom, or exercise any other rights
     hereunder with respect to the Collateral so long as the
     Assignor [Elmco] is not in default hereunder. Monies
     received by the Assignor from the Collateral during and
     attributable to any period when the Assignor is not in
     default hereunder shall be received by Assignor free and
     clear of the rights of the Secured Party under this
     Assignment, and the Secured Party shall have no claim to and
     shall not be entitled to trace such monies in the hands of
     the Assignor.
                               - 6 -


     On December 22, 1982, pursuant to the Purchase Agreement,

GCC and petitioner entered into the "Lease Agreement", whereby

petitioner leased the computer equipment back to GCC with a term

extending to December 31, 1991.   The lease payments followed the

payment schedule under petitioner's Buyer Acquisition Note.    The

Lease Agreement required GCC to make rental payments of $830 per

month for the first 36 months, then $11,792.70 for the next 72

months.   GCC also agreed to pay petitioner on December 31, 1982,

an additional sum of $1,240.71, as a per diem rental through that

date.   After December 31, 1986, GCC was to pay petitioner

supplemental rent equal to 85 percent of the "net rentals" until

petitioner received $80,000.   After that, GCC agreed to pay

petitioner 55.25 percent of the "net rentals" through the end of

the lease.

     The Lease Agreement between GCC and petitioner contained a

broad indemnity clause providing, in part:

     Lessee hereby agrees to assume liability for, and does
     hereby agree to indemnify, protect, save and keep
     harmless Lessor and Lessor's successors and assigns
     from and against, any and all claims, causes of action
     or liability (including liability for negligence or in
     strict tort), including legal fees, imposed on,
     incurred by or asserted against Lessor or any of
     Lessor's successors or assigns, in any way relating to
     or arising out of ownership, possession, use or
     operation of the Equipment; provided, however, that
     Lessee shall not be required to indemnify Lessor or
     Lessor's successors and assigns for loss or liability
     in respect of any unit of Equipment arising from acts
     or events which occur after possession of such unit of
     Equipment has been delivered to Lessor in accordance
                                 - 7 -


     with Section 5, or loss or liability resulting from the
     willful misconduct or negligence of the party otherwise
     to be indemnified hereunder. Lessee's obligations
     hereunder shall be those of primary obligor
     irrespective of whether Lessor shall also be
     indemnified with respect to the same matter under any
     other agreement by any other person. Upon payment in
     full of any indemnities contained herein by Lessee,
     Lessee shall be subrogated to any rights of Lessor in
     respect of the matter against which indemnity has been
     given.

The Lease Agreement was a net lease under which GCC's obligation

to pay rent was unconditional and not subject to set-off.      As

security for its obligations under the Lease Agreement, GCC

granted petitioner a security interest in the underlying end-user

leases.    Additionally, the Lease Agreement provided that

petitioner, upon GCC's default, had the right to direct the

underlying lessees to make payment directly to petitioner.

Finally, GCC could substitute equipment where, in GCC's opinion,

a unit was uneconomical to lease, or where an end-user purchased

the equipment for its fair market value or pursuant to a purchase

option.7

     On December 22, 1982, GCC, Elmco, and petitioner entered

into a "Depository Agreement."    Pursuant to the Depository

Agreement, First Interstate Bank of Arizona (First Interstate)

agreed to receive, and transfer between accounts, the amounts



7
     If GCC replaced a unit of equipment, it would transfer title
to the replacement unit to petitioner free and clear of all
encumbrances, other than the rights of the end-user lessees.
                                - 8 -


that GCC, petitioner, and Elmco owed to each other.    The

Depository Agreement could not be modified, rescinded, or

amplified except by a writing signed by petitioner, Elmco, and

GCC.    Pursuant to the Depository Agreement, payments went as

follows:    (1) GCC made lease payments to First Interstate; (2)

First Interstate credited petitioner's account for GCC's rental

payments; (3) First Interstate then debited petitioner's account

for payments to Elmco on petitioner's Buyer Acquisition Note; (4)

First Interstate credited Elmco's account for petitioner's Buyer

Acquisition Note payments; (5) First Interstate then debited

Elmco's account for payments to GCC on its installment note; and

(6) First Interstate credited GCC's account for Elmco's

installment note payments.    If First Interstate received any

additional payments, it held those funds in petitioner's account

until receipt of a written directive signed by all three parties.

       On their 1982, 1983, and 1984 joint Federal income tax

returns, petitioners claimed losses from petitioner's computer

purchase and leaseback investment in the amounts of $75,000,

$110,000, and $105,000 respectively.     Respondent disallowed these

deductions in the October 18, 1989, notice of deficiency.

                               OPINION

       The first issue we must decide is whether petitioner is "at

risk" with respect to the long-term Buyer Acquisition Note.      As

stated above, respondent stipulated that petitioner is at risk
                                 - 9 -


with respect to the $18,500 cash payment and the three Equity

Promissory Notes.     Respondent argues, however, that, as to the

long-term Buyer Acquisition Note, petitioner is not at risk

because:    (1)   The Buyer Acquisition Note, though labeled

recourse, is, in substance, nonrecourse and (2) even if the Buyer

Acquisition Note is recourse, the transaction protects petitioner

against loss under section 465(b)(4).     Because we hold that,

under section 465(b)(4), the transaction protects petitioner from

loss, we need not decide whether the Buyer Acquisition Note is

recourse.    Petitioner, therefore, is not at risk with respect to

the Buyer Acquisition Note.

     Section 465(a)(1) provides that losses from certain

activities are deductible only to the extent that the taxpayer is

at risk with respect to each activity at the close of the taxable

year.   A taxpayer's amount at risk includes the amount of money

and the bases of property contributed to an activity.       See sec.

465(b)(1)(A).     The amount at risk also includes amounts borrowed

with respect to such activity.     See sec. 465(b)(1)(B).   Pursuant

to section 465(b)(2)(A), amounts borrowed with respect to an

activity include "amounts borrowed for use in an activity to the

extent that * * * [the taxpayer] is personally liable for the

repayment of such amounts."     Notwithstanding the foregoing

provisions, a taxpayer's amount at risk does not include amounts

protected against loss through nonrecourse financing, guarantees,
                                - 10 -


stop loss agreements, or other similar arrangements.    See sec.

465(b)(4).

     Petitioners contend that we should analyze the facts of the

instant case under the "worst case scenario" test articulated in

Emershaw v. Commissioner, 949 F.2d 841 (6th Cir. 1991), affg.

T.C. Memo. 1990-246, rather than the "economic reality" test used

by this Court and the vast majority of circuit courts that have

considered the issue.    See Levien v. Commissioner, 103 T.C. 120,

126-129 (1994), affd. without published opinion 77 F.3d 497 (11th

Cir. 1996).     To date, the Court of Appeals for the Third Circuit,

the venue for any appeal of the instant case, has yet to adopt

either test.8    Petitioners contend, however, that, based upon

Nicholson v. Commissioner, 60 F.3d 1020 (3d Cir. 1995), revg.

T.C. Memo. 1994-280, this Court should analyze the instant case

under the "worst case scenario" standard.    We disagree.

     Nicholson involved an appeal of this Court's refusal to

award a taxpayer attorney's fees under section 7430.    See

Nicholson, supra at 1024.     The Commissioner initially contended

that the taxpayer was not at risk with respect to a long-term

note used to finance a computer purchase and leaseback

transaction. See id. at 1023.     In particular, the Commissioner

argued that the form of the taxpayer's transaction constituted a


8
     See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445
F.2d 985 (10th Cir. 1971).
                                 - 11 -


prohibited "other similar arrangement" under section 465(b)(4).

See id. at 1027.   Before trial, however, the Commissioner

conceded that the taxpayer was at risk and allowed the loss

deductions.   See id. at 1024.    After a favorable settlement, the

taxpayer sought attorney's fees, which fees this Court denied.

See id. at 1024-1025.   The Court of Appeals for the Third

Circuit, however, agreed with the taxpayer, holding that this

Court abused its discretion in not awarding attorney's fees

pursuant to section 7430.   See id. at 1030-1031.

     In its opinion, the Court of Appeals for the Third Circuit

decided that the Commissioner's initial position, with respect to

the propriety of the taxpayer's loss deductions, was not

substantially justified.    See id. at 1029.   The court, however,

stated:

     Although this court has yet to address this issue, we
     agree with the Commissioner that the reasonableness of
     her position should be evaluated under the economic
     reality test as it has been adopted by the overwhelming
     majority of the courts to address the issue. Whether
     or not we would adopt it in a case in which we were
     required to decide whether certain deductions were
     proper, we believe that if the Commissioner satisfied
     the economic reality test here, her position had a
     reasonable basis in law. [See id. at 1027.]

Although the court considered the Commissioner's arguments under

the economic reality standard, the court emphasized that "we do

not purport to adopt the economic reality test as the law of this

circuit."   Id. at 1027 n.10.
                                - 12 -


     Petitioners argue that the court's statement supports a

"clear inference" that the Court of Appeals rejected the economic

reality test in favor of the worst case scenario test.    We

believe that petitioners' contention is without merit.    We read

Nicholson v. Commissioner, supra, only to mean that the Court of

Appeals has reserved for another day any decision on which of the

tests it will adopt.

     Petitioners also argue:

     In Nicholson Jr., the court placed the burden on
     petitioner, adopted arguendo the economic reality test,
     and required a showing of abuse of discretion.
     Notwithstanding the fact that the court drew every
     inference favorable to respondent, it imposed an
     extraordinary sanction on the respondent and required
     respondent to pay the taxpayer's fees.

Petitioner asserts that respondent's defeat on the attorney's

fees issue in Nicholson means "certain defeat" for respondent in

the instant case.   Respondent, however, contends that petitioners

fail to account, sufficiently, for the significant factual

distinctions between Nicholson and the instant case.     We agree

with respondent.

     In Nicholson, Equipment Leasing Exchange, Inc. (ELEX)

purchased computer equipment from a third party and financed it

through an unrelated bank.     ELEX then leased the equipment to a

local school.   As a condition of its nonrecourse loans, ELEX

granted the bank a security interest in both the equipment and

the lease.   Later in the year, ELEX sold the equipment and
                              - 13 -


assigned the lease to the taxpayer.    In exchange, the taxpayer

executed two short-term notes and one long-term note.    All three

notes were secured by the equipment and the lease, subject to the

security interest of the bank.    In addition, the monthly rent

payments from the school were nearly the same as the monthly

payments due on the taxpayer's long-term note to ELEX.      Nicholson

v. Commissioner, supra at 1022.

     In the instant case, there is no bank or other third party

lien on the equipment.   Accordingly, no third party has a stake

in the transaction.   Moreover, unlike Nicholson, where the

initial purchase, financing, leasing, and resale of the equipment

occurred through separate and distinct transactions, all

components of the instant transaction were structured and set in

motion simultaneously on December 22, 1982.    On the other hand,

the instant case involves a binding circular payment arrangement

providing for offsetting payments and bookkeeping entries; i.e.

the Depository Agreement.   This is unlike Nicholson, where there

was no payment arrangement of any kind.    Moreover, Nicholson does

not contain the same degree of circularity as does the instant

case.   In Nicholson, the school was obligated to pay the

taxpayer, who was obligated to pay ELEX which, in turn, had an

obligation to pay the bank.   Each of the obligations in Nicholson

was separate and independent of the others.    There, the court

found it significant that ELEX prepaid its loans to the bank, a
                               - 14 -


fact that had led the Commissioner to settle on such favorable

terms.    See Nicholson v. Commissioner, 60 F.3d at 1024.

Petitioners have adduced no evidence in the instant case of

whether Elmco did, or could, prepay its loan from GCC.      Finally,

Nicholson, unlike the instant case, did not involve a broad

indemnity clause that protected the taxpayer from loss.

     In short, we see no reason not to continue to adhere to our

position that the economic reality of a transaction controls.

See Levien v. Commissioner, 103 T.C. at 128-129.    We decide the

substance of a transaction by looking at all the material facts.

See id.   As we stated in Levien:

     We have previously addressed a similar argument [that
     the worst-case scenario should apply] in Wag-A-Bag,
     Inc. v. Commissioner, T.C. Memo. 1992-581, in which we
     determined that 'whichever standard is used, the
     ultimate decision rests upon the substance of the
     transaction in light of all the facts and
     circumstances.' We continue to hold to the view--
     expressed in Wag-A-Bag--that, under section 465(b)(4),
     economic reality should be the touchstone of the
     analysis. [Id. at 128-129.]

     We scrutinize the economic reality of leasing activities by

focusing in particular upon:   The relationships between the

parties; whether the underlying debt is nonrecourse; the presence

of offsetting payments and bookkeeping entries; the circularity

of the transaction; and the presence of any payment guarantees or

indemnities.   See id. at 125-126.   "Neither the form chosen, the

labels used, nor a single feature of the transaction generally
                              - 15 -


will control."   Thornock v. Commissioner, 94 T.C. 439, 449

(1990).

     In the instant case, evidence of a sufficient number of the

foregoing elements is present to lead us to conclude that

petitioner is not at risk.   All of the long-term monthly

obligations of the parties to the transaction are nearly exactly

offset by payments from another party to the transaction.9    The

GCC Lease, the Buyer Acquisition Note, and Elmco's purchase note

all commence on the same date and all terminate on the same date.

It is highly unlikely, due to the circular nature of the

transaction, that any one of the parties to the transaction would

refuse to meet its obligations.   As stated in American Principals

Leasing Corp. v. United States, 904 F.2d 477, 483 (9th Cir.

1990), "if one party failed to 'pay', he could only expect a

chain reaction resulting in his obligor's ceasing 'payment' as

well."

     Of course, the parties to the transaction in the instant

case have no intention of fulfilling their payment obligations

with a circular stream of physical transfers.   Rather, the

Depository Agreement provides a convenient, book-entry mechanism



9
     The only exception, a minor one not favorable to petitioner,
is that GCC's rental payments over the last 72 months of the
lease ($11,792.70 per month) exceeded petitioner's obligations
($11,716.70 per month over the last 72 months) under the Buyer
Acquisition Note.
                                - 16 -


to facilitate the circular, offsetting payment scheme.     Except

for the end-user lessees, the transaction between GCC,

petitioner, and Elmco is entirely closed.10     The Depository

Agreement binds all of the parties to the transaction and cannot

be modified, rescinded, or amplified except by a signed writing

by petitioner, Elmco and GCC.    Consequently, none of parties to

the transaction can unilaterally cease making payments.

     Despite the binding nature of the Depository Agreement,

petitioners argue that section 465(b)(4) is inapplicable because

GCC can refuse to meet its lease obligations.     Petitioners assert

that it is not the circularity of the transaction that matters

but whether Elmco would still enforce the Buyer Acquisition Note

if GCC defaults under the lease.      Indeed, GCC's refusal to honor

its lease obligations would not compromise Elmco's right to

enforce petitioner's obligations under the Buyer Acquisition

note.    The taxpayers in American Principals Leasing Corp. v.

United States, supra, set forth a similar argument, but were

unsuccessful.     The court stated:

        It is true that the government has directed this court
        to no evidence that June Partners' [partnership in


10
     GCC did not borrow to purchase the computer equipment.
Accordingly, unlike many purchase and leaseback transactions,
see, e.g., American Principals Leasing Corp. v. United States,
904 F.2d 477 (9th Cir. 1990) and Levien v. Commissioner, 103 T.C.
120 (1994), because there was no underlying loan, no third party
creditor stood by threatening to enforce its security agreement
if GCC defaulted on its loan payments.
                                - 17 -


     which taxpayers invested] note to Softpro [in Elmco's
     position] is contingent upon Finalco [in GCC's
     position] discharging its obligations to June Partners.
     We believe, however, that the Baldwins [in petitioner's
     position] nevertheless fall within subsection
     465(b)(4). [Id. at 483.]

We reject petitioners' attempt to make the same argument in

the instant case.

     Petitioners' argument that Elmco would choose to enforce the

Buyer Acquisition Note is not supported by the record.      Although

the instant case is fully stipulated, petitioners still bear the

burden of proof.    See Rule 142(a).     They, however, have adduced

no evidence that Elmco would enforce the Buyer Acquisition Note

if GCC defaults on the lease.    In short, we find that petitioners

fail to meet their evidentiary burden of proving that Elmco would

enforce the Buyer Acquisition Note.

     The broad indemnity agreement in the GCC Lease provides

further protection from loss to petitioner.      The protection

provided by the broadly scripted indemnity clause can easily be

read to encompass losses incurred by petitioners as a result of

Elmco's enforcement of the Buyer Acquisition Note.      On prior

occasions, e.g., Estate of Bradley v. Commissioner, T.C. Memo.

1997-341 and Wag-A-Bag, Inc. v. Commissioner, T.C. Memo. 1992-

581, we considered indemnity provisions similar to the one in

issue in the instant case.    In Estate of Bradley, we concluded

that the indemnity clause constituted a "firewall" which would
                              - 18 -


have stopped the spread of losses with the effect of protecting

the taxpayer against loss. In Wag-A-Bag, we concluded that the

indemnity clause constituted a collateral agreement sufficient to

satisfy even the worst case scenario test articulated in Emershaw

v. Commissioner, 949 F.2d 841 (6th Cir. 1991), affg. T.C. Memo.

1990-246.   We see no reason to view the indemnity clause in issue

in the instant case any differently.

     We conclude that the circularity of payments, the book-entry

payment mechanism, and the indemnity clause in the GCC lease,

when taken together, effectively immunize petitioner from any

realistic possibility of suffering an economic loss.    We hold

that petitioner is, therefore, not at risk under section 465 and

is not entitled to the deductions in question.

     With respect to increased interest under section 6621,

petitioners present no argument as to why the provision should

not apply, other than contending that petitioner is at risk and,

therefore, not liable for increased interest pursuant to section

6621.   Because we have held that petitioner is not at risk, we

also hold that the instant transaction is tax-motivated for the

purpose of petitioners' liability for increased interest under

section 6621.   See sec. 6621(c)(3)(A)(ii).   We have considered
                             - 19 -


petitioners' other arguments but find them irrelevant or

unnecessary to reach.11


11
     Petitioners assert that petitioner's liability under the
Buyer Acquisition Note, because it is negotiable, potentially
"runs to the world" and that this fact puts petitioner at risk
with respect to the note. The court in Waters v. Commissioner,
978 F.2d 1310, 1317 (2d Cir. 1992), affg. T.C. Memo. 1991-462,
addressed, and rejected, this same argument. The court decided,
on facts very similar to those of the instant case, that the
possibility that the note might be negotiated was "more
theoretical than realistic." Id.    The court stated, "If at some
future date the unexpected occurred and the note was negotiated
to a third party, * * * [the taxpayer] might at that juncture
become at risk and be able to take deductions unavailable in
prior years." Id. Petitioners' argument is likewise rejected in
the instant case.
     Petitioners additionally argue that petitioner should be
considered at risk regarding the Buyer Acquisition Note under the
Court of Appeals' reasoning in Peracchi v. Commissioner, 143 F.3d
487 (9th Cir. 1998), revg. T.C. Memo. 1996-191. We disagree,
because Peracchi is inapplicable to the instant case. Although
the court mentioned section 465 in passing, see id. at 493 ("The
Code seems to recognize that economic exposure of the shareholder
is the ultimate measuring rod of a shareholder's investment. Cf.
I.R.C. § 465 (at-risk rules for partnership investments)"),
Peracchi dealt with an entirely different issue under subchapter
C. Moreover, the court expressly confined its holding to cases
where a "note is contributed to an operating business which is
subject to a non-trivial risk of bankruptcy or receivership."
Id. at 493 n.14. Those facts are not before us in the instant
case.
     Additionally, petitioners rely on Martuccio v. Commissioner,
30 F.3d 743 (6th Cir. 1994), revg. T.C. Memo. 1992-311, where the
Court of Appeals for the Sixth Circuit ruled favorably for a
taxpayer on the "at risk" issue. The taxpayer in Martuccio
invested in a computer purchase and leaseback transaction, also
involving Elmco, similar in some respects to the one in the
instant case. Petitioners contend that, were we to hold for
respondent, we would be treating petitioners differently from
other similarly situated taxpayers because they reside in the
Third Circuit rather than the Sixth Circuit (where the worst case
scenario standard is applied under sec. 465(b)(4)). Petitioners
argue that "But for this accident of geography the government
                                                   (continued...)
                             - 20 -


     To reflect the foregoing,


                                      Decision will be entered

                                 under Rule 155.




11
 (...continued)
would concede the instant case." Petitioners' argument is
without merit. Whether we rule for petitioners or respondent in
the instant case, petitioners will have treatment different from
other similarly situated taxpayers. Compare Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971) (Golsen doctrine established) with Lardas v. Commissioner,
99 T.C. 490 (1992).
