                       T.C. Memo. 2003-31



                     UNITED STATES TAX COURT



            SABA PARTNERSHIP, BRUNSWICK CORPORATION,
               TAX MATTERS PARTNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*


   OTRABANDA INVESTERINGS PARTNERSHIP, BRUNSWICK CORPORATION,
               TAX MATTERS PARTNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 1470-97, 1471-97.      Filed February 11, 2003.


          During 1990 and 1991, B, a domestic corporation,
     realized substantial capital gains from the sale of a
     number of its business units.

          In 1990, B joined with a foreign bank (ABN)
     purportedly to form two general partnerships, S and O.
     The partnerships engaged in financial transactions that
     were intended to satisfy the requirements of a
     contingent installment sale under I.R.C. sec. 453.
     Relying on the ratable basis recovery rules under sec.
     15A.453-1(c), Temporary Income Tax Regs., 46 Fed. Reg.


     *
      This opinion supplements our previously filed Memorandum
Opinion in Saba Pship. v. Commissioner, T.C. Memo. 1999-359,
vacated and remanded 273 F.3d 1135 (D.C. Cir. 2001).
                               - 2 -

     10709 (Feb. 4, 1981), the transactions were prearranged
     so that a substantial percentage of the partnerships’
     "gains" were allocated to ABN--a foreign entity that
     was not subject to U.S. income tax, while a substantial
     percentage of the partnerships’ “losses” were allocated
     to B. For the taxable years ending 1990 and 1991, B
     reported capital losses of $142,953,624 and
     $32,631,287, respectively.

          Held: There is no meaningful distinction between
     the partnerships in these cases and the partnership
     determined to be a sham in ASA Investerings Pship. v.
     Commissioner, 201 F.3d 505 (D.C. Cir. 2000), affg. T.C.
     Memo. 1998-305. Held, further, the partnerships were
     not organized or operated for a nontax business
     purpose, and therefore, they are disregarded for
     Federal income tax purposes.


     Joel V. Williamson, Thomas C. Durham, and

Gary S. Colton, Jr., for petitioner.

     Jill A. Frisch and Lewis R. Mandel, for respondent.



                  SUPPLEMENTAL MEMORANDUM OPINION

     NIMS, Judge:   These cases are before the Court on remand

from the Court of Appeals for the District of Columbia Circuit.

Saba Pship. v. Commissioner, 273 F.3d 1135 (D.C. Cir. 2001)(Saba

II), vacating and remanding T.C. Memo. 1999-359.    In Saba Pship.

v. Commissioner, T.C. Memo. 1999-359 (Saba I), we reviewed

notices of final partnership administrative adjustment (FPAAs)

issued to Saba Partnership (Saba) and Otrabanda Investerings

Partnership (Otrabanda) (sometimes, collectively, the

partnerships).   In the FPAAs, respondent made adjustments to the

partnerships’ tax returns for certain taxable years ending in
                               - 3 -

1990 and 1991 based on alternative determinations that (1) Saba

and Otrabanda were sham partnerships that should be disregarded

for Federal income tax purposes; and (2) the partnerships’

purported contingent installment sale transactions (CINS

transactions) under section 453 were shams that should be

disregarded for Federal income tax purposes.   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.

     Petitioner in these cases is Brunswick Corporation, the

partnerships’ tax matters partner (Brunswick or petitioner).

     In Saba I, we described in detail Brunswick’s divestiture of

certain of its business lines, its discussions with

representatives of Merrill Lynch regarding a tax shelter that the

latter was marketing to certain U.S. corporations, its decision

to join with Algemene Bank Nederlands N.V. (ABN) to form the

partnerships known as Saba and Otrabanda, and the partnerships’

purported CINS transactions.   We held that the disputed CINS

transactions were not motivated by legitimate nontax business

purposes, nor were they imbued with objective economic substance.

Consequently, we held that the CINS transactions were shams that

would not be respected for Federal income tax purposes.
                              - 4 -

     In Saba II, the Court of Appeals vacated and remanded these

cases

     for reconsideration in light of our recent decision in
     ASA Investerings Partnership v. Commissioner, 201 F.3d
     505 (D.C. Cir. 2000) [affg. T.C. Memo. 1998-305], where
     we invalidated what appears to be a similar-–perhaps
     even identical-–tax shelter on the grounds that the
     entire partnership, not merely the specific
     transactions at issue, was a sham for federal tax
     purposes. [Saba II, 273 F.3d at 1136.]

The Court of Appeals also stated that a remand to this Court was

appropriate because

     in presenting its case in the Tax Court, Brunswick may
     have acted on the mistaken belief that the Supreme
     Court’s decision in Moline Properties, Inc. v.
     Commissioner, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed.
     1499 (1943), established a two-part test under which
     Saba and Otrabanda must be respected simply because
     they engaged in some business activity, an
     interpretation that ASA squarely rejected, see ASA, 201
     F.3d at 512 * * *. [Saba II, 273 F.3d at 1141.]

     At the time of trial in these cases, the parties entered

into a series of stipulations of facts.   All stipulated facts and

exhibits are incorporated herein by this reference.   We also

incorporate by reference all our findings of fact in Saba I. (For

convenience, all citations of Saba I will include citations of

the specific page(s) of the Court’s slip opinion.)

     After these cases were remanded, the parties filed opening

briefs and reply briefs addressing the issues raised by the Court

of Appeals.

     Pursuant to the Court of Appeals’ mandate, we consider

whether Saba and Otrabanda are sham partnerships that should be
                               - 5 -

disregarded for Federal income tax purposes.   Petitioner bears

the burden of proof.   Rule 142(a); Brown v. Commissioner, 85 T.C.

968, 998 (1985), affd. sub nom. Sochin v. Commissioner, 843 F.2d

351 (9th Cir. 1988).

I.   Partnership Status Under Statutory and Case Law

      Petitioner first contends that Saba and Otrabanda qualify as

partnerships for Federal income tax purposes consistent with the

statutory definitions of partnerships (and partners) set forth in

sections 704(e), 761, and 7701(a)(2), and in accordance with

Supreme Court decisions in cases such as Commissioner v. Tower,

327 U.S. 280 (1946), and Commissioner v. Culbertson, 337 U.S. 733

(1949).   Petitioner avers that “a person should be treated as a

partner when he or she owns capital in a partnership in which

capital is a material income-producing factor, without regard to

whether the partnership was formed to avoid tax.”

      We need not dwell on this argument because the Court of

Appeals did not direct us to evaluate the technical compliance of

the partnerships.   Instead, the Court of Appeals directed us to

consider whether the partnerships should be recognized at all for

Federal income tax purposes consistent with the standards the

Court articulated in ASA Investerings Pship. v. Commissioner, 201

F.3d 505 (D.C. Cir. 2000), affg. T.C. Memo. 1998-305.   We were
                               - 6 -

also directed to consider whether Saba and Otrabanda are

distinguishable from the partnership that the Court of Appeals

determined to be a sham in ASA Investerings Pship.

II.   Whether Saba and Otrabanda Are Distinguishable From ASA

Investerings Partnership

      Petitioner asserts that the Saba and Otrabanda partnerships

were significantly different from the ASA Investerings

Partnership, and that Saba and Otrabanda should be recognized as

valid partnerships and not shams for Federal income tax purposes.

Before addressing petitioner’s specific arguments, we briefly

review the factual background in ASA Investerings Pship. v.

Commissioner, supra.

      In ASA Investerings Pship., the Commissioner issued an FPAA

to a Merrill Lynch-designed partnership whose principal partners

were AlliedSignal, Inc., and ABN.   The Court of Appeals held that

the disputed partnership would not be recognized for Federal

income tax purposes on the ground it was not organized to conduct

business activity for a purpose other than tax avoidance.   In so

holding, the Court of Appeals sustained this Court’s findings

that ABN did not share in the partnership’s profits and losses.

Id. at 514.   The Court of Appeals agreed that the purported

partners did not share profits because “direct payments made to

ABN were to compensate it merely for its funding costs”, and “ABN

could make no profit from the transaction: any potential profit
                               - 7 -

from the LIBOR notes would be offset by losses from the

concomitant swap transactions.”     Id.   The Court of Appeals also

concluded that “any risks inherent in ABN’s investment were de

minimis” because “The PPNs were essentially risk free”, “any loss

on the PPNs would be embedded in the value of the LIBOR notes”,

and ABN “succeeded in hedging all but a de minimis amount of the

risk associated with the LIBOR notes.”      Id. at 514-515.

     We note that after the instant cases were remanded to the

Court, the Court of Appeals issued its opinion in Boca

Investerings Pship. v. United States, 314 F.3d 625, ___ (D.C.

Cir. 2003), revg. 167 F. Supp. 2d 298 (D.D.C. 2001), citing ASA

Investerings Pship. v. Commissioner, supra, in support of its

holding that another Merrill Lynch-designed partnership would not

be recognized as a valid entity for Federal tax purposes because

it was not organized for a nontax business purpose.

     Petitioner contends that Saba and Otrabanda are

distinguishable from ASA Investerings Partnership in that (1)

Brunswick did not promise a guaranteed or specified return to

ABN, and (2) the partners agreed to share partnership expenses

and losses.   Petitioner made these same claims in arguing its

case before the Court of Appeals.    Saba II, 273 F.3d at 1140-

1141.   The Court of Appeals expressed skepticism that petitioner

could demonstrate “significant differences” between the actions

of Brunswick in these cases and those of AlliedSignal in ASA
                                 - 8 -

Investerings Pship.    Id.   As the discussion which follows

reveals, petitioner has failed to demonstrate that there are any

significant differences in the two cases.

     A.   Guaranteed or Specified Return

     Petitioner maintains that there was no agreement among the

partners that ABN would be paid a specified return on the funds

it contributed to the partnerships.      Petitioner further contends

that there is no evidence in the record that ABN was in fact paid

a specified return on its funds, stating:

     The payment of a ‘specified return’ would have required
     detailed calculations of interest rates, time periods,
     and principal amounts. There is nothing in the Saba
     record to suggest that any such calculations were ever
     made. The record in Saba contains thousands of pages
     of documents, but there is not one scrap of paper which
     calculates the payments which would be necessary to
     provide a specified return. The witnesses testified no
     such calculations were ever made.

     It is disingenuous for petitioner to suggest that a

determination that Brunswick paid fees to ABN would have required

a detailed calculation of interest rates, time periods, and

principal amounts.    Respondent asserts, and we agree, that

Brunswick, ABN, and Merrill Lynch (acting as a middleman)

understood that Brunswick would pay ABN fees to participate in

the partnerships.    Respondent points to internal documents

maintained by Brunswick and ABN that refer to anticipated “fees”,

Brunswick’s payment of “consulting fees” to ABN, and Merrill

Lynch’s valuation of Saba’s LIBOR notes as evidence that
                               - 9 -

Brunswick paid ABN fees in exchange for its participation in the

partnerships.   Respondent contends that the absence of an

explicit agreement regarding ABN’s fees merely reflects

Brunswick’s strict adherence to the warning in the January 26,

1990, memorandum prepared by Judith P. Zelisko, Brunswick’s

Director of Taxes, hereinafter the Zelisko memorandum, that

“there cannot have been any agreements, negotiations, or

understandings of any kind among the Partners”.   Saba I, slip op.

at 15-18 (quoting the pertinent portions of the Zelisko

memorandum).

     We acknowledge that the record in these cases does not

include an explicit agreement that Brunswick would pay ABN a

specific fee in exchange for its participation in the

partnerships.   Nor does the record include a detailed calculation

of such fees.   However, the record contains compelling

circumstantial evidence that Brunswick transferred fees to ABN in

exchange for its participation in the partnerships.   In ASA

Investerings Pship. v. Commissioner, 201 F.3d at 514, the Court

of Appeals relied upon similar evidence to infer that

AlliedSignal made transfers to ABN pursuant to a prearranged

agreement to compensate ABN for its funding costs.
                              - 10 -

     The evidence that we find compelling in the instant cases

includes the following:

     •   The August 7, 1989 memorandum prepared by Johannes den

     Baas (den Baas), an ABN vice president, which outlined his

     understanding of ABN’s role in the Merrill Lynch tax shelter

     in pertinent part as follows:

           The remuneration for ABN * * * will be 70-80
           bps. [basis points] spread over the
           outstanding participation plus $100,000
           upfront fee and all out of pocket expenses
           covered (legal fees etc.). Since the
           structure itself will not carry the
           possibilities for this level of remuneration
           the income will be received by ABN New York
           in upfront payments made by the corporation.
           [Saba I, slip op. at 22.]

     •   The Zelisko memorandum which stated in pertinent part:

           3. Compensation fees to the FP [foreign
           partner]. Merrill Lynch talked in terms of
           40-75 basis points on the FP’s equity
           investment. [Saba I, slip op. at 17.]

     •   The February 15, 1990 den Baas memorandum (pertaining to

     the Saba partnership) which stated in pertinent part:

           ABN will receive again an upfront fee
           representing 75 bps over LIBOR over the
           outstanding plus the 15 bps funding
           difference between LIBOR and CP [commercial
           paper] upfront. The amount will be around
           $600,000 but we have negotiated a minimum fee
           of $750,000 upfront excluding ABN Trust
           Curacao's fees. [Saba I, slip op. at 22.]

    •    The $535,000 amount that Merrill Lynch characterized as a

    “fee” and added to its valuation of Saba’s LIBOR notes in

    conjunction with Brunswick’s purchase of 50 percent of
                               - 11 -

     Sodbury’s partnership interest.    Saba I, slip op. at 38-

     40.

     •   Brunswick’s payment of $750,000 to ABN over 3 years

     (ostensibly for consulting services) that Brunswick charged

     against its Accrued Disposition Costs reserve account

     allocated to partnership activity.   Saba I, slip op. at

     39.

     •   The June 19, 1990 den Baas memorandum (pertaining to the

     Otrabanda partnership) which stated in pertinent part:

           although the loan spread will be 30 bps. the
           transaction will yield 85 bps. over LIBOR
           (the difference to be paid separately).
           Total remuneration $600,000 excluding the
           Trust fee. [Saba I, slip op. at 54.]

     • Brunswick’s payment of $645,000 to Bartolo in December

     1990, ostensibly to gain control of Otrabanda, but referred

     to in Brunswick’s accounting records as a fee.   Saba I,

     slip op. at 71.

     Petitioner contends that ABN did not expect a specified

return on the funds that it invested in the partnerships and

downplays the mention of “upfront fees” in den Baas’ February 15,

1990, memorandum.   Petitioner suggests that den Baas was merely

conveying ABN’s hope “to earn a certain dollar amount of fees by

generating a relationship with Brunswick.”   We reject

petitioner’s interpretation.
                              - 12 -

     The August 7, 1989, memorandum by den Baas unambiguously

states that ABN will receive a specified payment from its

corporate partner because the partnership’s proposed investments

would not provide ABN with an adequate return on its capital.

The February 15, 1990, and June 19, 1990, memoranda by den Baas

issued with regard to ABN’s participation in Saba and Otrabanda,

respectively, echo the proposition that ABN will receive payments

from its corporate partner; i.e., Brunswick.   Consistent with the

foregoing, we note that den Baas acknowledged at trial that he

understood from the start that the partnerships’ investments

would not provide ABN with the return it required on its funds.

These factors demonstrate to our satisfaction that ABN expected

that Brunswick would provide remuneration or fees in exchange for

ABN’s participation in the partnerships.

     There is also ample evidence in the record that Brunswick

transferred fees to ABN.   We first observe that petitioner is

essentially mum with regard to the $535,000 amount that Merrill

Lynch characterized as a fee and added to its valuation of Saba’s

LIBOR notes.   The addition of this fee to the value assigned to

Saba’s LIBOR notes had the effect of inflating the price that

Brunswick paid ABN (through Sodbury) for 50 percent of its Saba

partnership interest.

     Petitioner’s reply brief includes an objection to

respondent’s proposed finding of fact that the $535,000 amount
                                  - 13 -

represented additional remuneration to Sodbury.     Petitioner’s

objection states in pertinent part:

       Respondent neglects to state that it was Pepe who added
       the $535,000 to the value of the LIBOR notes, without
       informing Brunswick. Petitioner agrees that this
       valuation resulted in a transfer of wealth from
       Brunswick to Sodbury, however, it would not be accurate
       to characterize the inadvertent transfer as
       “remuneration”.

       Under the circumstances, we assume that petitioner’s

position remains that Brunswick was unaware of the aforementioned

fee.    In particular, the parties’ first stipulation of facts

addressed Merrill Lynch’s valuation of Saba’s LIBOR notes in

pertinent part as follows:

            265. * * * The valuation letters dated July 13,
       1990 [Jt. Ex. 148-J(5)] and August 17, 1990 [Jt. Ex.
       148-J(8)] and Saba’s financial statements consistent
       with such letter included an additional amount of
       $535,000 added to Merrill’s calculated value of the
       LIBOR Notes. The valuation letter dated September 14,
       1990 [Jt. Ex. 148-J(10)] and Saba’s financial statement
       consistent with such letter included an additional
       amount of one-fourth of the $535,000, or $133,750,
       added to Merrill’s calculated value of the LIBOR Notes.

            266. Brunswick contends that it was not aware
       that the July 13, 1990, August 17, 1990, and September
       14, 1990 valuation letters included an additional
       amount of $535,000 (or a pro rata portion thereof, in
       the case of the September 14 letter) added to Merrill’s
       calculated value of the LIBOR Notes. Any references to
       this additional amount in this Stipulation are not
       intended as a stipulation that Brunswick was aware of
       this additional amount. Respondent does not agree with
       Brunswick’s contention.

            *     *     *     *       *    *    *

            272. For purposes of computing the price of the
       July 13, 1990 purchase, the partners used Merrill’s
                              - 14 -

      LIBOR Note value, set forth in Joint Exhibit 148-J(5).
      For purposes of that valuation, Merrill valued the four
      Fuji and Norinchukin LIBOR Notes held by Saba at
      $36,215,000, and then added to that amount $2,035,000.
      This $2,035,000 amount consisted of $1,500,000 of
      private placement discount and a $535,000 additional
      amount. Pepe’s notes (Ex. 136-J at BC010168) reflect
      the valuation.

      Bearing in mind the admonition in the Zelisko memorandum

that “there cannot have been any agreements, negotiations, or

understandings of any kind among the Partners”, we base our

evaluation of whether Brunswick actually transferred fees to ABN

upon the record as a whole.   Saba I, slip op. at 17.   Although

Brunswick was largely successful in abiding the warning in the

Zelisko memorandum and concealing its transfers to ABN, we are

convinced for the reasons discussed above that Brunswick did in

fact pay ABN to participate in the partnerships.

      It simply defies reason to suggest that Brunswick overlooked

or was unaware that Merrill Lynch added the $535,000 fee to its

valuation of Saba’s LIBOR notes resulting in what petitioner

characterizes as an “inadvertent transfer” from Brunswick to ABN.

Brunswick must be charged with knowledge of the fee inasmuch as

petitioner stipulated that Merrill Lynch’s valuation letters were

provided to Saba and incorporated in Saba’s financial statements.

Petitioner also stipulated that Brunswick relied upon Merrill

Lynch’s valuation to determine the price that it would pay for 50

percent of Sodbury’s partnership interest.   Saba I, slip op. at

38.   One could reasonably expect that if the transfer were truly
                               - 15 -

inadvertent, Brunswick would have requested a refund from ABN.

However, petitioner does not suggest that Brunswick requested

such a refund.   Considering all the circumstances, we conclude

that Brunswick was fully cognizant of, and acquiesced in, the

transfer of a $535,000 fee to ABN as remuneration for its

participation in the partnerships.

      The fact that Brunswick assented to the transfer of $535,000

to ABN leads us to conclude that Brunswick also used the

previously mentioned consulting fees and the Otrabanda control

premium as disguised means to transfer additional amounts to ABN.

Brunswick had the motive and the opportunity to inflate those

payments to provide ABN remuneration for its participation in the

partnerships.    Under the circumstances, we conclude that they did

so.

      Petitioner argues in the alternative that, even assuming

that Brunswick made payments to ABN, such payments only provided

ABN with a minimum guaranteed return.   Petitioner cites S.& M.

Plumbing v. Commissioner, 55 T.C. 702, 703 (1971), and

Hunt v. Commissioner, T.C. Memo. 1990-248, for the proposition

that a guaranteed minimum payment is not inconsistent with

partnership status.    Petitioner’s reliance on the aforementioned

cases is misplaced.

      Suffice it to say that, when an ostensible partner is

guaranteed a specified or minimum return on its capital
                              - 16 -

contribution, that factor is one of many that must be considered

in determining whether the arrangement constitutes a partnership

that will be recognized for Federal tax purposes.    See S.& M.

Plumbing v. Commissioner, supra at 707.   In this regard, in ASA

Investerings Pship. v. Commissioner, 201 F.3d at 514, the Court

of Appeals rejected the taxpayer’s reliance on Hunt v.

Commissioner, supra, and distinguished the case in part on the

ground that “both parties [in Hunt] had a bona fide business

purpose for entering into the partnership”.    Given that we

conclude (as discussed in detail below) that Brunswick and ABN

did not have a nontax business purpose for entering into the

partnerships, whether the amounts that Brunswick transferred to

ABN are properly characterized as a specified return or a

guaranteed minimum return is not dispositive.    What is pertinent

is our conclusion that Brunswick paid ABN to participate in the

Saba and Otrabanda partnerships much the same as AlliedSignal

paid ABN to participate in the ASA Investerings Partnership.

     B.   Agreement To Share Partnership Expenses/Losses

     Petitioner contends that Saba and Otrabanda can be

distinguished from the partnership under review in ASA

Investerings Pship. v. Commissioner, supra, because Brunswick and

its partners shared partnership expenses and losses.    Petitioner

relies upon the parties’ stipulations that Saba and Otrabanda

paid the partnerships’ operating expenses.    Petitioner further
                              - 17 -

asserts that the partnerships’ investments were subject to

significant risks that were not hedged against, and, therefore,

the partners were not fully protected against losses.    While

acknowledging that “Brunswick absorbed the friction on the PPNs

and IBJ CDs when these instruments were distributed to

Brunswick”, petitioner contends that (1) Brunswick’s assumption

of these costs is not inconsistent with partnership status, and

(2) equal sharing of losses among the partners is not required

under applicable State law.   (Saba and Otrabanda were formed

under New York law.)   Saba I, slip op. at 26, 56.

     Expenses

     Although Saba and Otrabanda paid certain operating expenses,

Saba I, slip op. at 28-29, 58, 60-61, we agree with respondent

that the underlying circumstances beg the question whether

Brunswick actually incurred the expenses.   The record shows that

ABN and Brunswick expected that Brunswick would pay the

partnerships’ operating expenses.   The August 7, 1989, memorandum

by den Baas (quoted above) expressly stated that ABN would be

compensated for out-of-pocket expenses and legal fees.    Likewise,

the Zelisko memorandum stated in pertinent part that “Legal fees

for BC [Brunswick Corp.] and operating expenses of the

Partnership which would be paid by BC, would run about $400,000 -

$500,000.”   Saba I, slip op. at 17.
                               - 18 -

     Brunswick’s and ABN’s expectations that the partnerships’

operating expenses would be paid by Brunswick were met.   As was

the case in ASA Investerings Pship. v. Commissioner, supra, a

portion of the partnerships’ expenses and/or losses was in fact

shifted to Brunswick through Merrill Lynch’s valuation of Saba’s

and Otrabanda’s LIBOR notes.   Merrill Lynch valued the LIBOR

notes so that Brunswick fully absorbed the private placement

discount (totaling $2,250,000) incurred on the sale of the

partnerships’ PPNs and CDs.    Saba I, slip op. at 33-38, 62-68.

     For the sake of completeness, we note that petitioner

contends that Brunswick was unaware of Merrill Lynch’s

application of the private placement discounts.   In particular,

the parties’ stipulations state:

     234. Brunswick contends that it was not aware that
     Merrill included a discount of $1,500,000 in
     calculating the sales price of the Chase Notes, and
     Brunswick contends that it was not aware that Merrill
     applied such a discount in determining the value of the
     LIBOR notes on their origination. Any references to
     this discount in this Stipulation are not intended as a
     stipulation that Brunswick was aware of the discount.
     Respondent does not agree with Brunswick’s contentions.

     468. Brunswick contends that it was not aware that
     Merrill included a discount of $750,000 in calculating
     the sales price of the IBJ CDs, and contends that it
     was not aware that Merrill applied such a discount in
     determining the value of the LIBOR notes on their
     origination. Any references to this discount in this
     Stipulation are not intended as a stipulation that
     Brunswick was aware of the discount. Respondent does
     not agree with Brunswick’s contentions.
                               - 19 -

     Like the $535,000 fee that made its way into Merrill Lynch’s

valuation of Saba’s LIBOR notes, we find it incredible that

Brunswick was unaware that Merrill Lynch added the private

placement discounts to the value of the LIBOR notes.     Just as

before, we charge Brunswick with knowledge of Merrill Lynch’s

valuation methodology inasmuch as Merrill Lynch’s valuation

letters were provided to Saba and Otrabanda and were relied upon

by Brunswick to determine the price that it would pay for 50

percent of Sodbury’s and Bartolo’s partnership interests.     Saba

I, slip op. at 38-40, 67-68.

     We also reject petitioner’s assertion in its reply brief

that Brunswick’s absorption of the transaction costs relating to

the purchases and sales of the PPNs, CDs, and LIBOR notes “was

not the result of any agreement between ABN and Brunswick”.     As

den Baas’ August 7, 1989, memorandum and the Zelisko memorandum

plainly show, ABN and Brunswick understood at the outset that the

LIBOR notes would be distributed to Brunswick as a required

element in its tax-avoidance plan.      Consequently, it follows that

Brunswick and ABN must have agreed in advance that Brunswick

would absorb the partnerships’ expenses and losses and that a

large portion of those expenses and losses would be transferred

to Brunswick through the valuation of the LIBOR notes.

     We are not persuaded by petitioner’s contention that ABN and

Brunswick would have shared in the partnerships’ potential losses
                              - 20 -

from the credit risk, credit spread risk, event risk, and

liquidity risk inherent in the partnerships’ investments.       ABN

did not assume any more than de minimis risk with regard to the

partnerships’ investments.   See ASA Investerings Pship. v.

Commissioner, 201 F.3d at 514-515.     First, the partnerships’ PPNs

and CDs posed little or no risk of loss because they were issued

by banks with high credit ratings and they were held for less

than a month.   Saba I, slip. op. at 30-33, 61-62.    Second, as

discussed above, the private placement discounts attributable to

the PPNs and CDs were embedded in the value of the LIBOR notes

and were wholly absorbed by Brunswick.    Finally, Merrill Lynch

arranged swaps for Brunswick and ABN to hedge against interest

rate risk.   Saba I, slip. op. at 51-53, 75-77.   The parties

stipulated that ABN entered into hedge transactions outside the

partnerships that substantially reduced its risk to fluctuations

in the value of the LIBOR notes.   See stipulations Nos. 314-320,

505-517.

     Based on the foregoing, we conclude that there are no

meaningful differences between the partnerships in the instant

cases and the partnership under review in ASA Investerings Pship.

v. Commissioner, supra.   Although the record does not include an

explicit fee agreement between Brunswick and ABN, or a precise

accounting of the fees and expenses that Brunswick incurred in

carrying out its tax avoidance plan, we further conclude that
                               - 21 -

Brunswick and ABN, with Merrill Lynch’s assistance, did their

best to conceal and obscure the true nature of the underlying

transactions.

III.   Whether Saba and Otrabanda Engaged In Business Activity in

Furtherance of a Nontax Business Purpose

       As previously mentioned, the Court of Appeals stated that

its remand would give petitioner a further opportunity to address

the question whether Brunswick entered into the partnerships for

a business purpose other than tax avoidance.    The Court of

Appeals directed that the parties should address the validity of

the partnerships in these cases under the rationale of Moline

Properties v. Commissioner, 319 U.S. 436 (1943), as explicated by

the Court of Appeals in ASA Investerings Pship. v. Commissioner,

supra at 512, as follows:

            Getting to the controlling issue, petitioner
       argues that under the standard established in Moline
       Properties v. Commissioner, 319 U.S. 436, 63 S.Ct.
       1132, 87 L.Ed. 1499 (1943), the partnership cannot be
       regarded as a sham. The Court there said that a
       corporation remains a separate taxable entity for tax
       purposes “so long as [its] purpose is the equivalent of
       business activity or is followed by the carrying on of
       business by the corporation.” 319 U.S. at 439, 63
       S.Ct. 1132. The Tax Court has since applied Moline to
       partnership cases. See Bertoli v. Commissioner, 103
       T.C. 501, 511-12, 1994 WL 579942 (1994).

            Petitioner views Moline as establishing a two-part
       test, under which a tax entity is accepted as real if
       either: (1) its purpose is “the equivalent of business
       activity” (not tax avoidance), or (2) it conducts
       business activities. Moline, 319 U.S. at 439, 63 S.Ct.
       1132. Because ASA “engaged in more than sufficient
       business activity to be respected as a genuine entity,”
                               - 22 -

     petitioner argues that ASA was a partnership under the
     second alternative. Petitioner’s Reply Br. at 12. We
     agree if engaging in business activity were sufficient
     to validate a partnership ASA would qualify. It was
     infused with a substantial amount in capital ($1.1
     billion), and invested it in PPNs, LIBOR notes, and
     other short-term notes over a period of two years. In
     fact, however, courts have understood the “business
     activity” reference in Moline to exclude activity whose
     sole purpose is tax avoidance. This reading treats
     “sham entity” cases the same way the law treats “sham
     transaction” cases, in which the existence of formal
     business activity is a given but the inquiry turns on
     the existence of a nontax business motive. See Knetsch
     v. United States, 364 U.S. 361, 364-66, 81 S.Ct. 132, 5
     L.Ed.2d 128 (1960). Thus, what the petitioner alleges
     to be a two-pronged inquiry is in fact a unitary test–-
     whether the “sham” be in the entity or the
     transaction–-under which the absence of a nontax
     business purpose is fatal. [Fn. ref. omitted.]

Thus, if Saba and Otrabanda are to be recognized as valid

entities for Federal tax purposes, petitioner must show that the

partnerships engaged in business activity for a purpose other

than tax avoidance.    Boca Investerings Pship. v. United States,

314 F.3d 625 (D.C. Cir. 2003); Del Commercial Properties, Inc. v.

Commissioner, 251 F.3d 210, 214 (D.C. Cir. 2001).

     Petitioner argues that Saba and Otrabanda must be respected

for Federal income tax purposes because they engaged in the

“minimal” amount of business activity required to satisfy the

standards for recognition under Moline Properties v.

Commissioner, supra.   Petitioner cites the partnerships’

investments in commercial paper (and the profits derived

therefrom) as proof that the partnerships were operated for a

nontax business purpose.   In connection with this point,
                                - 23 -

petitioner avers that, unlike ASA Investerings Pship. v.

Commissioner, supra, the partners shared in the profits derived

from the commercial paper.

     Petitioner also argues that the Court in its original

Memorandum Opinion “made a legal error in determining that

Brunswick did not have a business purpose for forming Saba and

Otrabanda” and the Court “erred in substituting its own judgment

for that of Mr. Reichert [Brunswick’s chairman, president, and

chief executive officer] in determining whether Brunswick was

susceptible to a takeover and whether the partnerships would be

helpful in preventing a takeover.”

     Respondent counters that

          There is not a shred of documentary evidence
     corroborating Petitioner’s purported nontax goals and
     no economic analysis supports them. Brunswick never
     viewed the partnerships as takeover defenses; instead
     of advertising their alleged deterrent effect to
     hostile acquirers, it eliminated the partnerships from
     its financial statements and showed them as cash. The
     LIBOR notes were useful to Brunswick only as a
     repository of paper tax losses; it consistently hedged
     its interest in the notes and sold them immediately
     after receiving them to avoid tax. Given the
     transactions’ monumental costs, Brunswick could not
     expect to generate any profit and the transactions
     generated only unnecessary costs. But petitioner never
     considered any of the transactions’ economics because
     it was buying $200 million in phantom tax losses.

     We considered and rejected petitioner’s arguments that Saba

and Otrabanda engaged in the disputed CINS transactions to

achieve nontax business purposes in Saba I.   Much of what we said

there is equally applicable in response to petitioner’s
                               - 24 -

contentions that the partnerships were organized and operated to

achieve nontax business purposes.   Saba I, slip op. at 112-117,

78 T.C.M. (CCH) 684, 718-719, 1999 T.C.M. (RIA) 99,359, 2272-

2274.

     For the same reasons that we recited in Saba I, we reject

petitioner’s contentions that the partnerships were organized and

operated to achieve nontax business purposes.   Contrary to

petitioner’s position, we have not substituted our own judgment

for that of Brunswick’s corporate officers.   We have simply

rejected their testimony as being both self-serving and

unsupported by the record as a whole.   We likewise are not

persuaded that the partnerships’ relatively modest profits from

their short-term investments, including commercial paper,

demonstrate that the partnerships were operated for a nontax

business purpose.   To borrow again from the Court of Appeals’

analysis in ASA Investerings Pship. v. Commissioner, 201 F.3d at

516, we observe that the partnerships could have realized profits

from any number of investment strategies at far lower transaction

costs than were incurred implementing Merrill Lynch’s tax

shelter.   Further, even under the most generous assumptions, any

expected profits from the partnerships’ investments paled in

comparison to the approximately $170 million of capital losses

that the partnerships were designed to generate for Brunswick.

Saba I, slip op. at 126-127.   The minimal business activity that
                             - 25 -

petitioner cites does not amount to a nontax business purpose for

the partnerships.

Conclusion

     We hold that there is no meaningful distinction between the

partnerships in these cases and the partnership determined to be

a sham in ASA Investerings Pship. v. Commissioner, supra.     We

further hold that Saba and Otrabanda were not organized or

operated for a nontax business purpose under the rationale of

Moline Properties v. Commissioner, supra.

     To reflect the foregoing,

                                      Decisions will be entered

                                 under Rule 155.
