CGF Indus., Inc. v. Commissioner

T.C. Memo. 1999-45

UNITED STATES TAX COURT

CGF INDUSTRIES, INC. AND SUBSIDIARIES, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 25343-93, 1090-94, Filed February 12, 1999.
2452-94, 15978-94.

Gale T. Miller, Laurence E. Nemirow, Robert S. Rich, and
John R. Wilson, for petitioners in docket Nos. 25343-93, 1090-94,
and 2452-94.

Patrick A. Jackman, Laurence E. Nemirow, Robert S. Rich, and
John R. Wilson, for petitioner in docket No. 15978-94.

Stephen M. Miller and Richard D. D'Estrada, for respondent.

MEMORANDUM OPINION

FAY, Judge: CGF Industries, Inc. (CGF), computes its income

on the basis of a fiscal year ending on March 31. For its 1988

1
Cases of the following petitioners are consolidated
herewith: Lincoln Industries, Inc. and Subsidiaries, docket
No. 1090-94; CGF Industries, Inc. and Subsidiaries, docket No.
2452-94; and Lincoln Industries, Inc. and Subsidiaries, docket
No. 15978-94.
 - 2 -

through 1992 taxable years, CGF was the common parent of an

affiliated group of corporations making a consolidated return of

income. By notices of deficiency respondent determined defi-

ciencies in Federal income taxes of the CGF affiliated group in

the following amounts:

Fiscal Year Ending Deficiency

1988 $4,369,352
1989 745,105
1990 362,525
1991 259,708
1992 214,805

Likewise, Lincoln Industries, Inc. (Lincoln), uses a fiscal

year ending on March 31 to compute its income. For taxable years

1989 through 1993, Lincoln was the common parent of an affiliated

group of corporations making a consolidated return of income. By

notices of deficiency respondent determined deficiencies in

Federal income taxes of the Lincoln affiliated group in the

following amounts:

Fiscal Year Ending Deficiency

1989 $294,285
1990 562,953
1991 562,653
1992 562,306
1993 578,561

By order of this Court dated January 19, 1995, these cases

were consolidated for purposes of trial, briefing, and opinion.

In a stipulation of partial settlement filed with the Court on

January 18, 1995, respondent conceded all deficiencies determined

against CGF and its subsidiaries for 1988, thus removing all

issues relating to the 1988 tax year from consideration in these
 - 3 -

cases. This leaves in controversy the sole remaining issue for

our decision: whether CGF and Lincoln are entitled to amortize

the costs of acquiring term interests in partnerships where

related persons simultaneously acquired the remainder interests

in those partnerships.

The facts of these cases are fully stipulated. The

stipulation of facts, first supplemental stipulation of facts,

stipulation of settled issues, and attached exhibits are incorpo-

rated herein by this reference. All section references are to

the Internal Revenue Code in effect for the taxable years in

issue, all Rule references are to the Tax Court Rules of Practice

and Procedure, and dollar amounts have been rounded to the near-

est dollar, unless otherwise indicated. The facts necessary for

an understanding of these cases are as follows.

Background of CGF

CGF, a Kansas corporation since 1972, maintains its princi-

pal offices in Topeka, Kansas. It is a family-owned corporation;

most of its stock is held by trusts for the benefit of members of

that family. It has been engaged, directly and through its

subsidiaries, in various businesses, including agriculture,

petroleum, real estate, manufacturing, and cable television. As

of August 1, 1988, the following entities owned the class A

common voting stock of CGF:
 - 4 -

Shareholder Ownership Percentage

Diana C. Broze Revocable Trust 18.258%
H. Bernerd Fink Revocable Trust 2.305
Marcia F. Anderson Revocable Trust 2.784
Ruth G. Fink Revocable Trust 38.893
Curmudgeon Revocable Trust,
Bruce G. Cochener, sole beneficiary 17.749
Bruce G. Cochener Trust Number One 0.925
Caroline A. Cochener Revocable Trust 17.255
Bruce M. Bolene Revocable Trust 0.490
Joaquin Mason Trust Number One 0.416
BENECO, Inc., Bruce M. Bolene
Revocable Trust, sole shareholder 0.925
Total 100.000

During July 1988, the directors of CGF were the following

individuals:

H. Bernerd Fink, chairman
Ruth G. Fink
Marcia F. Anderson
Diana C. Broze
Caroline A. Cochener
Bruce G. Cochener

Ruth G. Fink also served as president of CGF in July 1988.2

Background of Lincoln

Lincoln, a Kansas corporation since 1972, maintains its

principal offices in Lincoln, Nebraska. It is a family-owned

corporation; most of its stock is held by trusts for the benefit

of members of that family. It has been engaged, directly and

2
The relationships among CGF Industries, Inc. (CGF), and its
shareholder—family trusts and their beneficiaries are shown by
the following: The children of Ruth G. Fink, president of CGF
during July 1988, are Bruce G. Cochener, Diana C. Broze, and
Caroline A. Cochener. Each, including their mother, has a trust
(or, in some cases, multiple trusts) in his or her name, with
family members, within the meaning of sec. 318(a)(1)(A), as bene-
ficiaries of the trusts. There are also trusts in the names of
Ruth G. Fink's husband (H. Bernerd Fink), stepdaughter (Marcia F.
Anderson), and grandchild (Joaquin D. Mason).
 - 5 -

through its subsidiaries, in various businesses, including

agriculture, petroleum, and the wholesale and retail distribution

of textbooks and supplies.

As of December 9, 1988, the following entities owned

Lincoln's class A common voting stock:

Shareholder Ownership Percentage

George A. Lincoln Revocable Trust 2.9525%
Olivia G. Lincoln Revocable Trust 48.3327
Georgia L. Johnson Revocable Trust 12.1584
Edward M. Lincoln Revocable Trust 12.1584
Margaret L. Donlan Revocable Trust 12.1584
Ann L. Hunter Revocable Trust 12.2396
Total 100.0000

During calendar year 1988, the following individuals served

on Lincoln's board of directors:

George A. Lincoln, chairman
Olivia G. Lincoln
Robert A. Page
Georgia L. Johnson
Edward M. Lincoln
Margaret L. Donlan
Ann L. Hunter

Serving also as Lincoln's officers during that year were George

A. Lincoln as president, Olivia G. Lincoln as vice president, and

Bill C. Macy as executive vice president and treasurer.3

3
The relationships among Lincoln Industries, Inc. (Lincoln),
and its shareholder—family trusts and their beneficiaries are
shown by the following: George A. Lincoln, president of Lincoln
in calendar year 1988, and his wife, Olivia G. Lincoln, vice
president, each have trusts bearing their names, of which family
members, within the meaning of sec. 318(a)(1)(A), are the bene-
ficiaries. There are also trusts in the names of their four
children, whose surnames are Johnson, Lincoln, Donlan, and
Hunter.
(continued...)
 - 6 -

The Solicitation

By letter dated May 15, 1986, and an addendum dated March

30, 1988, Robert A. Page4 advised CGF and Lincoln's shareholders

on the benefits of a "split purchase of assets". According to

Mr. Page, the older generation would buy a life estate or term of

years, while the younger generation would purchase the remainder

interest. In the addendum, Mr. Page substituted the word

"corporation" for "older generation". In his words, the

objective of a split purchase5 was twofold: (1) To transmit

property to future generations without incurring a transfer tax

3
(...continued)

Familial ties also exist between CGF and Lincoln. Olivia G.
Lincoln and Ruth G. Fink, who served as president of CGF in July
1988, are sisters. Their brother is Willard Garvey, president of
a corporation named Garvey Industries, Inc.
4
Robert A. Page was an investment adviser to CGF and
Lincoln. His role, however, extended beyond that of just an
adviser. Mr. Page served on Lincoln's board of directors, and
beginning calendar year 1988, he also served on Lincoln's
executive committee. Mr. Page's role was not a passive one.
According to the minutes of the board's annual meeting convened
Oct. 8-10, 1987, Mr. Page "led an in-depth discussion regarding
the current and future operations of Lincoln Industries, Inc."
Mr. Page also has links to CGF and various family trusts.
He was vice president of DICO, Inc., a company which merged into
CGF effective July 1, 1988, pursuant to a merger agreement and by
resolution of CGF's board of directors. Mr. Page also acted as
trustee, or in more instances, as successor trustee in a handful
of family trusts. According to the trust agreements, the succes-
sor trustee assumes the duties of trustee in the event of the
trustee's death or inability or unwillingness to serve.
5
Throughout this opinion, we use the terms "split purchase",
"joint purchase", "joint asset acquisition", "joint asset
purchase", and "joint investment transaction" interchangeably to
mean a situation where person A and person B, for example, simul-
taneously acquire a present and a future interest in property,
respectively.
 - 7 -

cost; and (2) to extract corporate assets without incurring a

dividend or capital gains tax. The addendum stated that the

second described objective was the primary one. Indeed, Mr. Page

recognized early on that the overall purpose of the joint

purchase was transferring wealth to the remaindermen. As he

wrote in the May 15, 1986, letter:

The purchaser of the term interest or the life estate
has a lousy deal, which is really the purpose of the
transaction * * *. The objective is really the same as
in a private annuity, i.e., doing in the annuitants for
the benefit of the obligor, in this case it is doing in
the life tenant for the benefit of the remainderman.

Mr. Page regarded the joint purchase by a closely held corpora-

tion and its shareholders of, respectively, a life or income

interest and a remainder interest in property to be a favorable

device for meeting that objective.

Mr. Page, however, was aware of potential problems which

might frustrate a joint purchase, the most important for our

purposes being his statement about how a shareholder would fund

the remainder interest purchase. Mr. Page warned that "Simul-

taneous gifts of funds for the acquisition of the [remainder]

interest contain an element of risk in collapsing the transaction

into one of being a 'retained' interest rather than a 'purchased'

interest, in which case the favorable * * * tax results do not

occur."6 Mr. Page then offered his solution: "Gifts separated

6
Mr. Page was aware that, when a taxpayer attempts to carve
out a term interest in existing property for himself and transfer
the remainder interest to a third party, "the holder of the life
tenancy or the term interest," as he writes, "would not be able
(continued...)
 - 8 -

by time * * * would work." In the addendum of March 30, 1988, he

dismissed his prior concern altogether by what he called a

"break-through"; namely, the major decline in individual tax

rates. This would enable the shareholders to use corporate funds

to purchase the remainder interests, albeit at a small tax cost.

More specifically, Mr. Page suggested having the corporation

declare dividends and make stock redemptions sufficient to

generate after-tax funds for the purchase of the remainder

interests.

In another letter dated April 6, 1988, Mr. Page described in

somewhat greater detail how the joint purchase transaction would

take shape.7 Partnerships would be formed, and, where a corpora-

tion purchased a term of years in such newly created partner-

ships, its shareholders, in turn, would purchase the remainder

interests. Attached to the letter, Mr. Page provided a partner-

ship agreement form and supplemental agreements related thereto.

In order to make their purchases, the shareholders would receive

a major portion of the funds "from the after-tax proceeds of a[n]

* * * extraordinary dividend". Although Mr. Page recognized that

the amount distributed would be subject to "the so-called double

tax * * *, i.e., once when earned by the corporation and again

when made available to the corporat[ion's] shareholders", his

6
(...continued)
to amortize the cost of that interest for income tax purposes."
7
Although the letter was addressed to Garvey Industries,
Inc., and its shareholders, CGF and Lincoln's shareholders
received similar letters from Mr. Page.
 - 9 -

words remained encouraging about the success of the transaction

because of the decrease in individual and corporate tax rates at

that time. Indeed, Mr. Page hastened a final decision by the

shareholders on whether to do the transaction or not, when he

wrote in the letter:

The extraordinary dividend route, with a top rate of
28%, is of course much more economical than the prior
50% tax rate. In addition, the 1987 Revenue Act * * *
could lead one to believe the utilization of the
proposed transaction may have a relatively short life.
There is no question in my mind [that] the 28% tax
rate, an essential ingredient of the funding method, is
a short-term window of opportunity.

Mr. Page recognized that, to the corporation, the proposed

transaction was "'not good' in that for ten years all it receives

is the ordinary income of the partnership, and at the expiration

of the ten-year term, its entire initial investment * * *

disappears." But, as to the remaindermen, Mr. Page wrote:

assuming utilization of the after-tax proceeds from the
extraordinary dividend to pay for their remainder
interest, the effect is to extract cash from * * * [the
corporation] at an approximate 14% tax rate. In addi-
tion, if some of you wish for the remainder interest to
be acquired by your descendants or remote trusts, the
effect is to avoid both estate tax and generation
skipping tax if the holder is more than one generation
removed.

Mr. Page was careful to note that the success or failure of the

joint undertaking depended upon whether "the holders of the

remainder interests are * * * 'family members' and not

'strangers'." He then offered his final recommendation: the

shareholders, as a group, should participate in the purchase of

remainder interests in newly created partnerships.
 - 10 -

The CGF Partnerships

In July 1988, CGF formed five limited partnerships under the

Kansas Revised Limited Partnership Act: CGF One, L.P.; CGF Two,

L.P.; Santa Fe Partners, L.P.; Cloud Grey, L.P.; and Alpha One,

L.P. (collectively referred to as the CGF Partnerships).8 By

agreements (the CGF partnership agreements), the CGF Partnerships

created a general partner interest and a limited partner

interest. In all cases, the general partner owned partnership

interest A, and the limited partners owned partnership interest

B. The CGF partnership agreements also stated that the term of

each partnership would be 20 years.

CGF's shareholder–family trusts and, in one instance, a

partnership related to the trusts contributed cash to the CGF

Partnerships in exchange for partnership interest A. CGF, in its

own right, contributed cash in exchange for 10-year term

interests in partnership interest B. Its shareholders or, in

some cases, nonshareholder trusts and partnerships related to

CGF's shareholders, contributed cash for the remainder interests

in partnership interest B. For clarity and because the

remaindermen are either CGF shareholders or related thereto, all

the remaindermen are sometimes collectively referred to as the

CGF Family Trusts. A summary of the various entities making up

8
On July 22, 1988, by resolution of CGF's board of direc-
tors, CGF was authorized to purchase 10-year term interests in
five partnerships at an aggregate cost of $10,615,000. The
resolution also stated that a dividend in the amount of
$2,435,925 be paid 1 week later on July 29, 1988.
 - 11 -

the CGF Partnerships and their respective contribution amounts is

attached to this opinion as appendix A.

The CGF partnership agreements provided that each part-

nership's net profits and losses were to be borne by the partners

in the same percentage as their capital contributions; namely, .1

percent by the holder of partnership interest A and the remaining

99.9 percent by partnership interest B. The CGF partnership

agreements also required each partnership to make annual distri-

butions of income, pursuant to the Kansas Uniform Principal and

Income Act, and in accordance with the partners' interests in the

partnership.

Simultaneously with the execution of the CGF partnership

agreements, CGF and the CGF Family Trusts executed separate

agreements wherein they set down exactly how partnership interest

B would be owned. They agreed that CGF would be the owner of a

10-year term interest in partnership interest B, upon the

expiration of which it would become the sole property of the CGF

Family Trusts. During the period of its term interest, CGF was

entitled to all of the partnership income allocable to

partnership interest B, and, upon the expiration of the term

interest, the corporation was entitled to all accrued but unpaid

income.

CGF and the CGF Family Trusts contributed cash to the CGF

Partnerships in the following amounts in exchange for their

respective term and remainder interests in partnership interest

B:
 - 12 -

Limited CGF Trust
Partnership Contribution Contribution Total

CGF One, L.P. $2,011,312 $1,265,282 $3,276,594
CGF Two, L.P. 1,817,938 1,143,632 2,961,570
Santa Fe Partners, L.P. 2,265,250 1,425,028 3,690,278
Cloud Grey, L.P. 2,265,250 1,425,028 3,690,278
Alpha One, L.P. 2,265,250 1,425,028 3,690,278
Total 10,625,000 6,683,998 17,308,998

The amount contributed was computed using the interest rate then

contained in the Federal Estate and Gift Tax Regulations for

valuing term and remainder interests. See sec. 20.2031-7, Estate

Tax Regs.; sec. 25.2512-5, Gift Tax Regs.

In part, the money contributed by CGF's shareholders for

their remainder interests in partnership interest B came directly

from CGF via cash dividend distributions and stock redemptions.

In June and July 1988, CGF made distributions totaling

$9,375,000. The table below summarizes CGF's distributions in

calendar year 1988 to those shareholders investing in the CGF

Partnerships, followed by their respective contribution amounts:
 - 13 -

CGF One, L.P.

June 15, 1988 July 28, 1988 July 29, 1988 Partnership
Redemption Redemption Dividend Contribution
Recipient (Pretax) (Pretax) (Pretax) Total Amount

H. Bernerd Fink Revocable Trust -0- -0- $11,680 $11,680 $12,620
Ruth G. Fink Trust Number One -0- -0- 435,311 435,311 328,121
Ruth G. Fink Charitable Trust Number One -0- -0- 15,427 15,427 277,641
Ruth G. Fink Partnership,1
Ruth G. Fink Revocable Trust, Partner -0- -0- 1,793 1,793 1,290
Total 464,211 619,672

CGF Two, L.P.

Marcia F. Anderson Revocable Trust $255,145 $230,890 14,060 500,095 330,794
Robert J. Anderson Revocable Trust 51,315 -0- -0- 51,315 34,220
Jane E. Anderson Revocable Trust 163,680 -0- 130,545 294,225 193,914
Nancy J. Anderson Revocable Trust 163,680 -0- 130,657 294,337 193,914
Robert J. Anderson, Custodian for
Susan M. Anderson 163,680 -0- 130,657 294,337 193,914
Marcia F. Anderson Trust Number One 302,500 -0- -0- 302,500 193,914
Total 1,736,809 1,140,670

Santa Fe Partners, L.P.

Caroline A. Cochener Trust 127,380 221,650 127,836 476,866 568,535
Caroline A. Cochener Trust Number Two -0- 201,190 216,871 418,061 284,268
Caroline A. Cochener Revocable Trust 706,365 -0- 38,047 744,412 284,268
Bruce M. Bolene Revocable Trust 8,635 -0- 2,532 11,167 284,268
Total 1,650,506 1,421,339

Cloud Grey, L.P.

Diana C. Broze Revocable Trust -0- 188,320 86,458 274,778 426,401
Vincent J. Broze Revocable Trust -0- 8,635 10,127 18,762 28,427
Joaquin Mason Trust Number One -0- 115,940 40,885 156,825 127,920
Joaquin Mason Trust Number Two -0- -0- 144 144 56,854
Vincent J. Broze, Custodian for
Joaquin D. Mason -0- 187,550 53,225 240,775 127,920
Diana C. Broze Trust Number Three -0- -0- 108,448 108,448 28,427
Diana C. Broze Trust Number Four -0- -0- 54,224 54,224 28,427
Diana C. Broze Trust Number Five -0- -0- 151,827 151,827 28,427
Diana C. Broze Trust Number Six 1,100,000 -0- -0- 1,100,000 568,535
Total 2,105,783 1,421,338

Alpha One, L.P.

Alpha, L.P.,1
Curmudgeon Revocable Trust, Partner 277,695 -0- 9,842 287,537 188,585
Nancy M. Cochener Revocable Trust, Partner 12,705 196,900 -0- 209,605 137,103
Bruce G. Cochener Trust Number One, Partner 587,620 -0- 413,671 1,001,291 658,400
Bruce G. Cochener Trust Number Two, Partner -0- -0- 81,824 81,824 53,805
Bruce G. Cochener Trust Number Three, Partner -0- -0- 20 20 14
Bruce G. Cochener Trust Number Four, Partner -0- 440,000 -0- 440,000 _ 287,884
Total 2,020,277 1,325,791
2
Grand Total 7,977,586 5,928,810
1
This entity, while itself not a shareholder of CGF, has (a) partner(s) that did own shares in CGF. Thus, viewing the
entity as an aggregate of its members, we list the separate contribution amount of such partner(s), along with any
distribution amounts made by CGF to the partner(s).
2
This amount reflects CGF's aggregate distributions in calendar year 1988 to shareholders who contributed to the CGF
Partnerships in exchange for the remainder interests in partnership interest B. Note that this amount is only $139,155
shy of the $7,838,431 of U.S. Government obligations that CGF disposed of in fiscal year 1989.

The Lincoln Partnerships

On March 31, 1988, Lincoln formed four general partnerships

under the laws of the State of Kansas: Lincoln Partnership #1;

Lincoln Partnership #2; Lincoln Partnership #3; and HFC
 - 14 -

Partnership.9 On October 31, 1988, each general partnership was

reorganized as a limited partnership under the Kansas Revised

Limited Partnership Act. Then on December 9, 1988, Lincoln

formed five more partnerships under the Kansas Revised Limited

Partnership Act: Lincoln 88 Partnership, L.P.; Lincoln

Partnership #11, L.P.; Two Thousand Eight Partnership, L.P.;

Donlan Partnership #1, L.P.; and HFC2 Partnership, L.P.10 All

nine partnerships formed in March and December 1988 are

collectively referred to as the Lincoln Partnerships. The

partnership agreement for each Lincoln Partnership (the Lincoln

partnership agreements) is similar in many respects to the CGF

partnership agreements, in that it created a general partner

interest, partnership interest A, and a limited partner interest,

partnership interest B. Pursuant to the Lincoln partnership

9
At a special meeting of Lincoln's board of directors on
Feb. 12–16, 1988, Mr. Page moved, and the board unanimously
approved, that Lincoln "[make] available up to $6 million for the
purchase of separate 10-year term interests". Mr. Page then
offered a second motion to have Lincoln accept a tender offer of
160,000 shares of class B preferred stock at $34 per share
between Mar. 16 and Mar. 23, 1988, with payment not later than
Mar. 31, 1988. Once again, the board unanimously approved. On
Mar. 28, 1988, Lincoln distributed $5,440,000 in stock redemp-
tions, 3 days before forming Lincoln Partnership #1, Lincoln
Partnership #2, Lincoln Partnership #3, and HFC Partnership.
10
At a special meeting of Lincoln's board of directors on
Oct. 7–8, 1988, a motion was made by Mr. Page, and unanimously
carried, that Lincoln "purchase term interests in up to five
partnerships at an aggregate amount to be determined at a later
date." Mr. Page also moved that Lincoln distribute $5,500,000 in
dividends on Oct. 31, 1988. This motion, too, was unanimously
carried. Then, approximately 1 month after this board meeting,
another meeting of Lincoln's board of directors was held on Nov.
14, 1988, during which the board approved the purchase of term
interests in five additional partnerships for $21 million.
 - 15 -

agreements, the term of the first four partnerships created was

limited to 20 years, and the term of the last five partnerships

created was 30 years.

Lincoln's shareholder-family trusts contributed cash to the

Lincoln Partnerships in exchange for partnership interest A.

Lincoln, in its own right, contributed cash in exchange for 10-

year term interests in four Lincoln Partnerships and 20-year term

interests in the remaining five Lincoln Partnerships (collec-

tively referred to as the Lincoln term interests). Lincoln's

term interests were, in all cases, designated term interests in

partnership interest B. Lincoln's shareholder-family trusts or,

in one instance, a limited partnership related to the former

contributed cash for the remainder interests in partnership

interest B. For convenience, all the remaindermen in the Lincoln

Partnerships are sometimes collectively referred to as the

Lincoln Family Trusts. The list of entities making up the

Lincoln Partnerships and their respective contribution amounts is

attached to this opinion as appendix B.

The Lincoln partnership agreements required the partners to

bear their respective partnerships' net profits and losses in the

same percentage as their capital contributions. Thus, six of the

Lincoln partnership agreements allocated 1 percent of net profits

and losses to the holder of partnership interest A and the

remaining 99 percent to partnership interest B, while the other

three Lincoln partnership agreements, like the CGF partnership

agreements, allocated .1 percent to partnership interest A and
 - 16 -

the remaining 99.9 percent to partnership interest B. The

Lincoln Partnerships, like their CGF counterparts, were also

required to make annual distributions of income, pursuant to the

Kansas Uniform Principal and Income Act, and in accordance with

the partners' interests in the partnerships.

Simultaneously with the execution of the Lincoln partnership

agreements, Lincoln and the Lincoln Family Trusts executed

separate agreements for each partnership detailing how

partnership interest B would be owned. Four of the nine

agreements stated that Lincoln would own partnership interest B

during the first 10 years of forming the partnership, after which

partnership interest B would become the sole property of the

Lincoln Family Trusts. The remaining five agreements stated that

Lincoln would own partnership interest B for a term of 20 years

from the date of its capital contribution, after which the

Lincoln Family Trusts would become sole owners of the interest.

During the period of the Lincoln term interests, Lincoln would be

entitled to all of partnership interest B's share of partnership

distributions.

Lincoln and the Lincoln Family Trusts made the following

cash contributions to the Lincoln Partnerships in exchange for

their respective term and remainder interests in partnership

interest B:
 - 17 -

Limited Lincoln Term Trust
Partnership Contribution Interest Contribution Total

Lincoln Partnership #1, L.P. $1,500,000 10 years $941,180 $2,441,180
Lincoln Partnership #2, L.P. 1,500,000 10 years 941,180 2,441,180
Lincoln Partnership #3, L.P. 1,500,000 10 years 941,180 2,441,180
HFC Partnership, L.P. 1,500,000 10 years 941,009 2,441,009
Lincoln 88 Partnership, L.P. 3,360,000 20 years 586,645 3,946,645
Lincoln Partnership #11, L.P. 4,410,000 20 years 769,972 5,179,972
Two Thousand Eight Partnership, L.P. 4,410,000 20 years 769,972 5,179,972
Donlan Partnership #1, L.P. 4,410,000 20 years 769,972 5,179,972
HFC2 Partnership, L.P. 4,410,000 20 years 769,972 5,179,972
Total 27,000,000 7,431,082 34,431,082

In calculating the contribution amounts, Lincoln and the Lincoln

Family Trusts used the actuarial tables set forth in the Federal

Estate and Gift Tax Regulations to value their respective term

and remainder interests.

The cash contributed by Lincoln's shareholders for their

remainder interests in partnership interest B came, in part, from

Lincoln via cash dividend distributions and stock redemptions.

In March, July, and October 1988, Lincoln made distributions

totaling $12,040,000. At the beginning of the year, in January,

1988, Lincoln also called 116,857 shares of its class A preferred

stock in the amount of $6,427,135. Thus, during calendar year

1988, Lincoln engaged in stock transactions totaling $18,467,135.

Lincoln funded this amount by withdrawing money from its invest-

ment in Net Venture, a partnership investing solely in U.S.

Government obligations.11 See discussion of Net Venture, infra.

11
During January 1988, when Lincoln called $6,427,135 worth
of its class A preferred stock, it also made a cash withdrawal of
$6,600,000 from its capital account with Net Venture (capital
withdrawal). On Mar. 28, 1988, the same day that Lincoln
redeemed $5,440,000 worth of its stock, it also made a $5,500,000
capital withdrawal. A few days later, on Mar. 31, 1988, Lincoln
made another capital withdrawal of $6,800,000. Less than 1 month
(continued...)
 - 18 -

The following is a summary of Lincoln's distribution activity and

the corresponding contribution amounts paid by Lincoln's share-

holders for their remainder interests in the Lincoln Partner-

ships:

11
(...continued)
before declaring a $1,100,000 dividend on June 1, 1988, Lincoln
made two more capital withdrawals totaling $10 million, one on
May 6, 1988, in the amount of $5 million, and the other on May
17, 1988, also of $5 million. On Oct. 31, 1988, the same day
that Lincoln paid a $5,500,000 dividend to its shareholders,
another $1,305,000 withdrawal was charged to Lincoln's capital
account with Net Venture.
 - 19 -

Lincoln Partnership #1, L.P.

Jan. 1988 Mar. 1988 June 1988 Oct. 1988 Partnership
Call Option Redemption Dividend Dividend Contribution
Recipient (Pretax) (Pretax) (Pretax) (Pretax) Total Amount

Georgia L. Johnson Revocable Trust $1,164,295 $1,360,000 $45,163 $249,314 $2,818,772 $938,739
Georgia L. Johnson Trust Number Four -0- -0- 24,587 122,936 147,523 2,441
Total 2,966,295 941,180

Lincoln Partnership #2, L.P.
Edward M. Lincoln Revocable Trust 1,170,235 474,028 45,829 252,642 1,942,734 117,647
Edward M. Lincoln Trust Number Two -0- 35,972 4,766 23,831 64,569 235,295
Edward M. Lincoln Trust Number Three -0- -0- 47,511 237,558 285,069 235,295
Edward M. Lincoln Trust Number Seven -0- 510,000 -0- -0- 510,000 117,647
Lincoln Family Trust Number Two -0- 340,000 38,895 194,475 573,370 235,295
Total 3,375,742 941,179

Lincoln Partnership #3, L.P.
Margaret L. Donlan Revocable Trust 675,235 1,360,000 45,559 251,293 2,332,087 739,782
Margaret L. Donlan Trust Number Five 495,000 -0- -0- -0- 495,000 201,397
Total 2,827,087 941,179

HFC Partnership, L.P.
Ann L. Hunter Trust Number Two -0- -0- 167 1,292 1,459 37,640
Lincoln Family Trust Number Four -0- 1,360,000 36,405 182,025 1,578,430 903,369
Total 1,579,889 941,009

Lincoln 88 Partnership, L.P.
Olivia G. Lincoln Revocable Trust 1,358,170 -0- 8,824 44,121 1,411,115 170,127
Olivia G. Lincoln Trust Number One -0- -0- 20,028 100,140 120,168 82,130
Olivia G. Lincoln Trust Number Two -0- -0- 20,028 100,140 120,168 82,130
Olivia G. Lincoln Trust Number Three -0- -0- 20,028 100,140 120,168 82,130
Olivia G. Lincoln Trust Number Four -0- -0- 20,028 100,140 120,168 82,130
George A. Lincoln Trust Number One -0- -0- 7,112 35,559 42,671 29,332
George A. Lincoln Trust Number Two -0- -0- 7,112 35,559 42,671 29,332
George A. Lincoln Trust Number Three -0- -0- 7,112 35,559 42,671 29,332
Total 2,019,800 586,643

Lincoln Partnership #11, L.P.
1 1
1 1 1
Georgia L. Johnson Revocable Trust 269,490
Georgia L. Johnson Trust Number Two -0- -0- 53,465 267,327 320,792 223,292
Total 320,792 492,782

Two Thousand Eight Partnership, L.P.
1 1 1 1 1
Edward M. Lincoln Revocable Trust 123,196
1 1 1 1 1
Edward M. Lincoln Trust Number Two 19,249
1 1 1 1 1
Edward M. Lincoln Trust Number Three 160,154
Edward M. Lincoln Trust Number Four -0- -0- 11,522 57,608 69,130 46,198
Edward M. Lincoln Trust Number Five -0- -0- 27,483 137,417 164,900 115,496
Edward M. Lincoln Trust Number Six -0- -0- 47,512 237,558 285,070 200,193
1 1 1 1 1
Lincoln Family Trust Number Two 105,486
Total 519,100 769,972

Donlan Partnership #1, L.P.
1 1 1 1 1
Margaret L. Donlan Revocable Trust 415,785
Margaret L. Donlan Trust Number Two -0- -0- 29,314 146,569 175,883 121,271
Margaret L. Donlan Trust Number Three -0- -0- 72,455 362,276 434,731 115,496
1 1 1 1 1
Margaret L. Donlan Trust Number Five 177,421
Total 610,614 829,973

HFC2 Partnership, L.P.
Ann L. Hunter Revocable Trust 654,500 -0- 74,268 394,381 1,123,149 269,490
Ann L. Hunter Trust Number Three -0- -0- 81,324 406,620 487,944 307,989
Ann L. Hunter Trust Number Four -0- -0- 45,690 228,451 274,141 153,994
Ann L. Hunter Trust Number Twenty-six 605,000 -0- -0- -0- 605,000 38,499
Total 2,490,234 769,972
2
Grand Total 16,709,553 7,213,889

1
As this trust is also a remainderman in another Lincoln Partnership, the distribution amount is not noted here since
it has already been recorded above. This is necessary to avoid counting twice the same distribution amount.
2
This amount reflects Lincoln's aggregate distributions in calendar year 1988 to shareholders who contributed to the
Lincoln Partnerships in exchange for the remainder interests in partnership interest B.
 - 20 -

Partnership Investments

The CGF and Lincoln Partnerships invested the partners'

capital contributions, directly and through investment part-

nerships, in U.S. Government bonds, short-term fixed income

obligations, and marketable securities, and in various

businesses, including precious metals, real estate, natural gas,

and hotel management. During CGF's taxable years in issue, the

CGF Partnerships, when examined collectively, invested most of

their assets in the following four investment partnerships: Net

Venture, Gopher Fund, Lake Union Hotel Associates Ltd. Partner-

ship (Lake Union), and GAR Ninety. The specific dollar amounts,

with corresponding percentage figures in parentheses, that each

CGF Partnership invested in the above–mentioned investment

partnerships are set forth in appendix C.

During Lincoln's taxable years in issue, the Lincoln Part-

nerships, when taken as a whole, invested most of their assets in

Net Venture, Gopher Fund, Gill Industries, L.P., and Falcon Fund.

Appendix D is a table showing the dollar amounts, with corre-

sponding percentage figures in parentheses, that each Lincoln

Partnership invested in the investment partnerships just listed.

Net Venture was a general partnership formed on November 29,

1985, between a corporation named Garvey, Inc., with Robert A.

Page as president, and four trusts; i.e., Olive W. Garvey

Revocable Trust, Ruth G. Fink Revocable Trust, Olivia G. Lincoln

Revocable Trust, and George A. Lincoln Revocable Trust.

According to its partnership agreement, its business purpose was
 - 21 -

investing solely "in direct obligations of the United States

Government, with the exception of very short–term temporary

investments in other fixed income type instruments pending

investment in direct United States obligations." The partnership

agreement states further that the maximum maturity of any

instrument will be 3 years.12

The Gopher Fund was a general partnership formed on

January 2, 1981, to invest in securities. Among its founding

partners were Garvey, Inc., with Robert A. Page as president,

numerous trusts bearing the Garvey name, and a few CGF share-

holders.

Lake Union, a limited partnership formed on December 1,

1989, to acquire, develop, operate, and manage hotels, had four

CGF Partnerships as limited partners; namely, CGF One, L.P., CGF

Two, L.P., Cloud Grey, L.P., and Alpha One, L.P.

GAR Ninety, a general partnership between Garvey, Inc., and

GAR Four, a partnership of which Garvey, Inc., was managing

partner, was formed on June 17, 1988. Under the GAR Ninety

partnership agreement, Robert A. Page's name was the only one

required as a signatory to the agreement. GAR Ninety's business

purpose was "making investments in gold, and pending such

investments, direct obligations of the United States Government,

or Partnerships so investing, with the exception of very short-

12
On Mar. 31, 1992, Net Venture's partnership agreement was
amended to provide that the maximum maturity of any investment
would be 5 years, and the maximum average maturity of all of its
investments would not exceed 3 years.
 - 22 -

term temporary investments in other fixed income type instru-

ments."

Gill Industries, L.P., formed on June 19, 1989, by two

Lincoln shareholder-family trusts, a non-shareholder-family

trust, and two Lincoln Partnerships, was in the sheet metal

business. Falcon Fund was a general partnership formed on

January 31, 1991, to invest in securities. Its founding partners

were Mosby Lincoln, Inc., a Kansas corporation, two Lincoln

Partnerships, and a Lincoln shareholder–family trust.

Financial Performance of the CGF and Lincoln Partnerships

On CGF's Federal income tax returns for the taxable years

ending March 31, 1989 through 1992, CGF reported the income and

expenses of owning term interests in the CGF Partnerships as

follows:
 - 23 -

Mar. 31, Mar. 31, Mar. 31, Mar. 31,
1989 1990 1991 1992 Totals

CGF One, L.P.
Income $87,610 $247,242 $225,118 $186,311 $746,281
Expenses 1 (9,113) (22,926) (21,654) (20,373) (74,066)
Amortization expense (134,088) (201,131) (201,131) (201,131) (737,481)
Net income or loss (55,591) 23,185 2,333 (35,193) (65,266)

CGF Two, L.P.
Income 82,625 233,708 214,574 179,041 709,948
Expenses 1 (7,044) (19,828) (18,383) (18,147) (63,402)
Amortization expense (121,196) (181,794) (181,794) (181,794) (666,578)
Net income or loss (45,615) 32,086 14,397 (20,900) (20,032)

Santa Fe Partners, L.P.
Income 106,683 294,733 269,836 226,920 898,172
Expenses 1 (10,453) (22,883) (24,046) (22,453) (79,835)
Amortization expense (151,017) (226,525) (226,525) (226,525) (830,592)
Net income or loss (54,787) 45,325 19,265 (22,058) (12,255)

Cloud Grey, L.P.
Income 102,808 291,338 264,831 215,715 874,692
Expenses 1 (10,336) (24,333) (22,992) (21,873) (79,534)
Amortization expense (151,017) (226,525) (226,525) (226,525) (830,592)
Net income or loss (58,545) 40,480 15,314 (32,683) (35,434)

Alpha One, L.P.
Income (or loss) 109,328 281,435 (42,355) (280,272) 68,136
Expenses 1 (8,045) (35,338) (16,421) (7,169) (66,973)
Amortization expense (151,017) (226,525) (226,525) (226,525) (830,592)
Net income or loss (49,734) 19,572 (285,301) (513,966) (829,429)

1
These amounts reflect CGF's allocations of portfolio income expense and investment interest expense,
as reflected on CGF's Schedules K-1 for the years in issue.

Over this 4-year period, CGF's total amortization deductions

exceeded its allocations of partnership income by $598,606

(income of $3,297,229 and amortization deductions of $3,895,835).

Respondent disallowed all of CGF's amortization deductions in

connection with owning term interests in partnership interests B

for such years.

Lincoln reported the following income and expenses of owning

term interests in the Lincoln Partnerships for the taxable years

ending March 31, 1989 through 1993:
 - 24 -

Mar. 31, Mar. 31, Mar. 31, Mar. 31, Mar. 31,
1989 1990 1991 1992 1993 Totals
Lincoln
Partnership #1, L.P.
Income $149,050 $198,129 $187,277 $169,864 $116,424 820,744
Expenses 1 (15,127) (13,252) (12,476) (34,994) (38,341) (114,190)
Amortization expense (150,000) (150,000) (150,000) (150,000) (150,000) (750,000)
Net income or loss (16,077) 34,877 24,801 (15,130) (71,917) (43,446)

Lincoln
Partnership #2, L.P.
Income 149,136 221,869 209,500 163,287 129,907 873,699
Expenses (14,531) (46,993) (36,626) (36,584) (38,645) (173,379)
Amortization expense (150,000) (150,000) (150,000) (150,000) (150,000) (750,000)
Net income or loss (15,395) 24,876 22,874 (23,297) (58,738) (49,680)

Lincoln
Partnership #3, L.P.
Income 149,038 200,833 203,125 186,726 127,427 867,149
Expenses 1 (14,535) (30,951) (52,987) (46,259) (40,085) (184,817)
Amortization expense (150,000) (150,000) (150,000) (150,000) (150,000) (750,000)
Net income or loss (15,497) 19,882 138 (9,533) (62,658) (67,668)

HFC Partnership, L.P.
Income 149,060 125,176 48,272 81,548 139,338 543,394
Expenses 1 (39,298) (67,798) (60,875) (60,994) (41,798) (270,763)
Amortization expense (150,000) (150,000) (150,000) (150,000) (150,000) (750,000)
Net income or loss (40,238) (92,622) (162,603) (129,446) (52,460) (477,369)

Lincoln 88 Partnership, L.P.
Income 26,756 343,078 356,683 326,129 284,163 1,336,809
Expenses 1 (5,824) (20,970) (19,566) (18,513) (19,875) (84,748)
Amortization expense (42,000) (168,000) (168,000) (168,000) (168,000) (714,000)
Net income or loss (21,068) 154,108 169,117 139,616 96,288 538,061

Lincoln
Partnership #11, L.P.
Income 57,738 473,567 454,991 422,188 357,760 1,766,244
Expenses 1 (9,499) (41,996) (25,881) (81,238) (82,297) (240,911)
Amortization expense (55,125) (220,500) (220,500) (220,500) (220,500) (937,125)
Net income or loss (6,886) 211,071 208,610 120,450 54,963 588,208

Two Thousand Eight
Partnership, L.P.
Income 11,181 469,729 454,248 381,249 302,874 1,619,281
Expenses (1,552) (39,747) (76,534) (76,202) (78,240) (272,275)
Amortization expense (55,125) (220,500) (220,500) (220,500) (220,500) (937,125)
Net income or loss (45,496) 209,482 157,214 84,547 4,134 409,881

Donlan
Partnership #1, L.P.
Income 11,181 469,741 461,009 423,668 296,173 1,661,772
Expenses 1 (1,586) (60,338) (91,066) (89,907) (75,460) (318,357)
Amortization expense (55,125) (220,500) (220,500) (220,500) (220,500) (937,125)
Net income or loss (45,530) 188,903 149,443 113,261 213 406,290

HFC2 Partnership, L.P.
Income 11,226 267,163 137,798 187,255 287,858 891,300
Expenses 1 (51,336) (132,790) (118,742) (118,573) (76,472) (497,913)
Amortization expense (55,125) (220,500) (220,500) (220,500) (220,500) (937,125)
Net income or loss (95,235) (86,127) (201,444) (151,818) (9,114) (543,738)

1
These amounts reflect Lincoln's allocations of portfolio income expense and investment interest
expense, as reflected on Lincoln's Schedules K-1 for the years in issue.

Over this 5-year period, Lincoln's allocations of partnership

income exceeded its amortization deductions by $2,917,892 (income

of $10,380,392 and amortization deductions of $7,462,500).
 - 25 -

Respondent disallowed all of Lincoln's amortization deductions in

connection with owning the Lincoln term interests.

Discussion

The issue we must decide is whether CGF and its subsidiaries

and Lincoln and its subsidiaries are entitled to amortize their

costs of acquiring term interests in partnerships. Petitioners

argue that they acquired expiring interests in property, and,

since their interests are wasting assets, that they are entitled

to recover their costs through amortization deductions. Peti-

tioners go on to argue that they and the Family Trusts (meaning

the CGF Family Trusts and the Lincoln Family Trusts collectively)

engaged in arm's-length transactions since petitioners acquired

only term interests in partnerships and based their purchase

prices on present value tables then contained in the Federal

regulations.

Respondent contends that petitioners and the Family Trusts

engaged in a tax scheme whose main purpose was to extract money

from the corporations without the incidence of taxation. Respon-

dent asserts that the transactions lacked business purpose and

economic substance since petitioners had no reasonable expecta-

tion of making a profit. Respondent argues further that, since

petitioners supplied a substantial portion of the money used to

acquire the remainder interests, the substance of the transac-

tions was the acquisition by petitioners of partnership interests

B in their entirety and a carving out of the remainders to the

Family Trusts. Thus, respondent concludes that petitioners have
 - 26 -

attempted to create amortization deductions by impermissibly

splitting nondepreciable assets; namely, partnership interests in

newly created partnerships. Petitioners counter that the sub-

stance of the transactions coincides with its form in that they

and the Family Trusts separately acquired their respective term

and remainder interests with separate funds.

As a general rule, a taxpayer who purchases a term interest

in property which is used in a trade or business or held for the

production of income is entitled to deduct ratably the cost of

that interest over its expected life.13 See, e.g., Early v.

Commissioner, 445 F.2d 166, 169 (5th Cir. 1971), revg. on another

ground 52 T.C. 560 (1969); Manufacturers Hanover Trust Co. v.

Commissioner, 431 F.2d 664 (2d Cir. 1970), affg. T.C. Memo. 1969-

132; 1220 Realty Co. v. Commissioner, 322 F.2d 495, 498 (6th Cir.

1963), affg. in part and revg. in part T.C. Memo. 1962-67. This

principle applies even though the property underlying the term

interest is not depreciable. See, e.g., Early v. Commissioner,

supra; Manufacturers Hanover Trust Co. v. Commissioner, supra;

1220 Realty Co. v. Commissioner, supra; Elrick v. Commissioner,

56 T.C. 903 (1971), revd. on another ground 485 F.2d 1049 (D.C.

Cir. 1973). It is also clear that, where a taxpayer, without

13
An exception to the general rule is sec. 167(e) (as
amended and in effect currently), which prohibits a taxpayer from
amortizing a term interest where a related person holds the
remainder interest. This section, however, applies only to term
interests acquired or created after July 27, 1989. Since peti-
tioners' term interests were created before that date, sec.
167(e) is inapplicable to the present cases.
 - 27 -

additional investment, divides nondepreciable property into two

parts, one of them being a term interest, amortization deductions

are not allowable. Lomas Santa Fe, Inc. v. Commissioner, 693

F.2d 71 (9th Cir. 1982), affg. 74 T.C. 662 (1980); United States

v. Georgia R.R. & Banking Co., 348 F.2d 278, 287-289 (5th Cir.

1965); Gordon v. Commissioner, 85 T.C. 309 (1985).

In these cases, the properties in question are partnership

interests, a type of property generally considered to be non-

amortizable. In form, petitioners acquired term interests in

limited partnerships, while the Family Trusts acquired the

remainders. We must decide whether the transactions are in

substance what they appear to be in form.

The precedents in Kornfeld v. Commissioner, 137 F.3d 1231

(10th Cir. 1998), affg. T.C. Memo. 1996-472, and Gordon v.

Commissioner, supra, require examination of all the singular

steps of a joint asset purchase to determine whether, in

substance, one party acquired full ownership of property and

carved out a remainder interest for related parties, or whether

related parties separately, and yet simultaneously, acquired term

and remainder interests in property, respectively. It is a well-

settled principle that formally separate steps in an integrated

series, focused toward a particular result, may be amalgamated

and treated as part of a single transaction.14 See Kornfeld v.

Commissioner, supra at 1235 (citing Commissioner v. Clark, 489

14
This rule is often referred to as the step transaction
doctrine.
 - 28 -

U.S. 726, 738 (1989)); Gordon v. Commissioner, supra at 324

(citing Commissioner v. Court Holding Co., 324 U.S. 331, 334

(1945); Helvering v. Clifford, 309 U.S. 331, 334 (1940); Grif-

fiths v. Helvering, 308 U.S. 355, 357-358 (1939); Professional

Servs. v. Commissioner, 79 T.C. 888, 913 (1982)).

While we are not required to sustain respondent's determina-

tions solely because tax reasons affected the way in which

petitioners structured the transaction, see Kornfeld v. Commis-

sioner, T.C. Memo. 1996-472, petitioners have the burden of

proving that respondent's determinations are erroneous, Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Where, as

here, the parties to the transactions are related, the level of

skepticism as to the form of the transaction is heightened,

"because of the greater potential for complicity between related

parties in arranging their affairs in a manner devoid of legiti-

mate motivations." Vaughn v. Commissioner, 81 T.C. 893, 908

(1983) (citing Bowen v. Commissioner, 78 T.C. 55, 78 (1982),

affd. 706 F.2d 1087 (11th Cir. 1983)).

We have confronted this same issue several times before in a

variety of contexts. In deciding these cases, we have undertaken

an intensely factual analysis of the substance of each

transaction. See, e.g., Kornfeld v. Commissioner, T.C. Memo.

1996-472; Gordon v. Commissioner, supra at 326-327; Lomas Santa

Fe, Inc. v. Commissioner, 74 T.C. at 681. Therefore, we believe

a brief review of the cases previously decided will paint a more
 - 29 -

complete picture and identify factors leading to our decision

herein.

In United States v. Georgia R.R. & Banking Co., supra, the

corporate taxpayer had leased certain of its stock holdings to a

third party for 99 years in return for $600,000 annually.

Approximately 73 years into the lease, the taxpayer distributed

its reversionary interest in the stock to its shareholders as a

dividend in kind. Thus the corporation retained its present

right to the lease payments, while its shareholders received a

remainder interest in the stock itself. The taxpayer then sought

to amortize over the remaining term of the lease its adjusted

basis in the stock, after charging off that portion of basis

representing the transferred remainder interest. After noting

that the underlying property would not have been exhausted when

the lease finally terminated, the court held that the leasehold

the taxpayer had created was not depreciable, inasmuch as the

taxpayer had incurred no additional costs in obtaining it. The

court also concluded that the dividend distribution of the

reversion also did not make the retained "lease" a depreciable

asset. In the words of the court: "By distributing the

reversion in 1954, taxpayer did nothing more than split its

bundle of property rights into two parts. We cannot see how this

action on its part can result in a depreciable asset where none

previously existed, unless it made some additional investment."

Id. at 288.
 - 30 -

In Lomas Santa Fe, Inc. v. Commissioner, 693 F.2d 71 (9th

Cir. 1982), the corporate taxpayer purchased land in fee simple

on which it planned to develop a luxury community. For State law

reasons, the taxpayer formed a subsidiary and transferred that

portion of the land designated as a golf course and country club

to the subsidiary, while retaining a 40-year term interest in the

golf course. The taxpayer then sought to amortize its basis in

the term interest over 40 years. Relying on United States v.

Georgia R.R. & Banking Co., supra, the court held that a taxpayer

who holds nondepreciable property (the golf course) in fee simple

may not create a depreciable asset by carving out a term interest

for itself and conveying the remainder to a third party.

Gordon v. Commissioner, supra, presented a somewhat

analogous situation to the one at hand. Dr. Gordon, the tax-

payer, had established a family trust for the benefit of his

minor children. Upon the advice of his lawyers, he agreed to

participate in an investment scheme geared for professionals

having qualified pension or profit-sharing trusts. The arrange-

ment called for joint purchases of tax-exempt bonds. The pro-

fessional would purchase at fair market value a life estate in

the bond, and the trust would purchase the remainder interest.

According to Dr. Gordon's lawyers, it would give him "'a sub-

stantial tax-free cash flow during his life, a proportionate tax

deduction over his life expectancy of his cost of acquisition,

and a reduction of his taxable estate.'" Id. at 311.
 - 31 -

Under the arrangement, Dr. Gordon purchased life interests

in tax-exempt bonds, while the family trust simultaneously pur-

chased the remainder interests, with the funds provided, in large

part, by Dr. Gordon. The taxpayer then sought to amortize the

cost of his income interest ratably over his expected life. We

held that, while, in form, the taxpayer had acquired a depre-

ciable income interest, in substance, he purchased full ownership

of the bonds and donated the remainder interests to the trust.

Id. at 330-331.

Invoking the step transaction doctrine to ignore the shift

of funds from Dr. Gordon to the family trust, the Court concluded

that "Dr. Gordon bought the whole bonds, using the family trust

as a mere stopping place for a portion of their purchase prices."

Id. at 328. We reasoned further that, although the trust owned

stock holdings which would have provided it with sufficient cash

to participate in the joint bond purchases, "the trust made no

real purchases, but was merely a way station for the accumulation

of cash provided for the most part by * * * [Dr. Gordon]." Id.

Consequently, applying the rationale of Lomas Santa Fe, Inc. v.

Commissioner, supra, and United States v. Georgia R.R. & Banking

Co., 348 F.2d 278 (5th Cir. 1965), we disallowed Dr. Gordon's

amortization deductions of his life interests in the bonds.

Kornfeld v. Commissioner, 137 F.3d 1231 (10th Cir. 1998),

was another case involving amortization of a life interest in

bonds. Julian Kornfeld, an experienced tax attorney, believed he

could structure a transaction which would give him income,
 - 32 -

estate, and gift tax benefits. His method was to enter into

agreements with his daughters to buy tax-exempt bonds, with

Mr. Kornfeld buying a life estate and his daughters buying the

remainder interests. Mr. Kornfeld, acting through a revocable

trust of which he was trustee, executed two such agreements,

after which Congress added a provision to the Federal tax law

disallowing the amortization of a term interest where the

remainder interest is held by a related party. See supra note

13. Aware of this change, Mr. Kornfeld amended the later

agreements to provide that one of his daughters would take a

second life estate in the bonds, and his long-time secretary

would take the remainder interest.

Mr. Kornfeld used the valuation tables published by the

Internal Revenue Service for estate and gift tax purposes to

calculate the respective values of the interests. He then

furnished his daughters and secretary with the amounts necessary

to purchase their interests and filed gift tax returns reflecting

those amounts. Thus, as recipients of the gifts, they were not

under any legal obligation to use that money to do the joint

asset purchase. As planned, though, they did participate, and

Mr. Kornfeld began amortizing ratably over his expected life his

cost of acquiring life interests in the bonds.

In analyzing the tax consequences, the Court of Appeals for

the Tenth Circuit, the court to which appeals by petitioner CGF

Industries, Inc. and Subsidiaries would generally lie, stepped

together the intermediate transactions that Mr. Kornfeld
 - 33 -

employed, and affirmed our holding that Mr. Kornfeld had acquired

full ownership in the bonds and then made a gift of the remainder

interests to his daughters and secretary. Id. at 1235. We

noted, and the Court of Appeals agreed, that the ability of

Mr. Kornfeld's daughters and secretary to use for other purposes

the funds he had given them was of minimal significance since the

parties operated under an understanding that the joint investment

would take place. Id. Thus, the transaction in question was an

impermissible attempt to create amortizable term interests out of

nondepreciable property, and the amortization deductions claimed

by Mr. Kornfeld were, accordingly, disallowed.

The last case, for our purposes, in this line is Richard

Hansen Land, Inc. v. Commissioner, T.C. Memo. 1993-248. While

facially similar to the situation here, it differs in several

significant respects. The taxpayer was a farming corporation

wholly owned by Richard E. Hansen, who also served as president

of the corporation. Five months after incorporation, the tax-

payer and Mr. Hansen jointly purchased land, with the taxpayer

buying a 30-year term interest for $211,165, and Mr. Hansen, the

taxpayer's shareholder, buying the remainder interest for

$12,835. Within 1 to 4 months before this purchase, the taxpayer

had transferred wheat valued at $28,416 to Mr. Hansen as wages.

Mr. Hansen purchased his remainder interest by using a portion of

the proceeds from selling the wheat that he had received as

compensation. The corporation then began amortizing its cost of

acquiring the term interest in the land.
 - 34 -

Richard Hansen Land, Inc. v. Commissioner, supra, like

Gordon v. Commissioner, 85 T.C. 309 (1985), and Kornfeld v.

Commissioner, T.C. Memo. 1996-472, involved the simultaneous

joint acquisition of term and remainder interests in property

acquired from a third party. However, we held in Richard Hansen

Land, Inc. v. Commissioner, supra, unlike the other two cases,

that the taxpayer did not use Mr. Hansen as a "mere stopping

place" for the funds used to make the acquisitions. Rather,

Mr. Hansen acquired his remainder interest entirely out of his

own earnings——by drawing on his personal bank account to make the

purchase. Although a portion of that amount constituted the

proceeds of selling the wheat he had received as wages, it was

more important that such wages were due and owing to Mr. Hansen

and separate, in our view, from the joint purchase that followed.

The taxpayer had an obligation to pay Mr. Hansen for his work in

the taxpayer's farming and ranching business, a point which the

Commissioner had conceded, regardless of whether Mr. Hansen chose

to participate in a joint asset purchase. As we noted in our

opinion: "Mr. Hansen rendered services to * * * [the taxpayer],

and there is nothing in the record that would indicate that the

transfer of wheat by * * * [the taxpayer] to Mr. Hansen repre-

sented anything other than wages." Id. The acquisitions of the

term and remainder interests by, respectively, the corporation

and Mr. Hansen, its sole shareholder, "'were in fact what they

appear to be in form.'" Id. (quoting Hobby v. Commissioner, 2

T.C. 980, 985 (1943)).
 - 35 -

With the foregoing in mind, we must decide whether peti-

tioners and the Family Trusts separately and independently

invested in the limited partnerships or whether petitioners, in

substance, acquired partnership interests B in their entirety,

retaining term interests, and transferring the remainders to the

Family Trusts. On the basis of the record before us, we conclude

that petitioners acquired the full partnership interests out-

right, and that the rationale of Lomas Santa Fe, Inc. v. Commis-

sioner, 693 F.2d 71 (9th Cir. 1982), and United States v. Georgia

R.R. & Banking Co., 348 F.2d 278 (5th Cir. 1965), applies to deny

petitioners their amortization deductions of term interests in

the CGF and Lincoln Partnerships.

As mentioned earlier in this opinion, Gordon v. Commis-

sioner, supra at 326-327, and Kornfeld v. Commissioner, 137 F.3d

1231 (10th Cir. 1998), highlight the manner in which we are to

dispose of the instant cases; i.e., by examining closely the

transactions in question in order to ascertain whether they were

really prearranged steps of a single transaction, cast from the

outset to achieve an ultimate result.15 This examination is

intensely factual.

15
This formulation of the step transaction doctrine
describes the "end result" test, one of three alternative tests
used for determining when and how to apply this doctrine in a
given situation. For a summary of the step transaction doctrine
and its three approaches, see our discussion in Penrod v.
Commissioner, 88 T.C. 1415, 1428-1430 (1987). Both Kornfeld v.
Commissioner, 137 F.3d 1231, 1235 (10th Cir. 1998), affg. T.C.
Memo. 1996-472, and Gordon v. Commissioner, 85 T.C. 309, 324
(1985), respectively, apply this test to step together the series
of related transactions at issue in those cases.
 - 36 -

Here, the evidence of record and the parties' stipulation of

the following facts show a plan for the joint purchase by related

parties of partnership interests for the sole purpose of

obtaining favorable tax benefits.16 While the legal right of a

taxpayer to decrease the amount of what otherwise would be his

taxes or altogether avoid them by means which the law permits

cannot be doubted, Gregory v. Helvering, 293 U.S. 465, 469

(1935), the Commissioner may disregard transactions which are

designed to manipulate the tax laws so as to create artificial

tax deductions, Northern Ind. Pub. Serv. Co. v. Commissioner, 115

F.3d 506, 512 (7th Cir. 1997) (citing Knetsch v. United States,

364 U.S. 361 (1960), as authority for that proposition), affg.

105 T.C. 341 (1995).

In 1986, Robert A. Page produced an 11-page letter, calling

it his "epistle", in which he described what he believed to be a

favorable device for extracting corporate assets without a

16
Joint asset acquisitions give rise to tax planning tech-
niques because value shifts from the present interest holder to
the future interest holder without the latter's being taxed when
the remainder interest vests in possession.
For purposes of this opinion, we take at face value the
parties' stipulated submission of Joint Exhibit No. 181-FY, in
which Mr. Page asserts that participating in the joint asset
acquisitions creates tax benefits for the remaindermen by
"extract[ing] cash from * * * [CGF and Lincoln] at an approximate
14% tax rate." Respondent asserts that this multitiered trans-
action was designed to create tax benefits for the term interest
holders, too. More specifically, respondent emphasizes that, by
participating in the joint asset acquisitions, petitioners sought
to match amortization deductions against their income on U.S.
Government securities, which they now owned indirectly through
limited partnerships.
 - 37 -

dividend or capital gains tax. One year later in 1987, Mr. Page

led an in-depth discussion regarding Lincoln's current and future

operations at Lincoln's annual board meeting.

In February 1988, during Lincoln's board meeting, Mr. Page

moved that Lincoln buy 10-year term interests for up to

$6 million. He also moved to have Lincoln redeem $5,440,000

worth of its preferred stock no later than March 31, 1988. An

addendum to Mr. Page's first letter followed in March 1988. Then

on March 28, 1988, Lincoln redeemed its preferred stock, and 3

days later, on March 31, 1988, Lincoln and the Lincoln Family

Trusts formed four of the nine Lincoln Partnerships.

In April 1988, Mr. Page prepared yet another letter fleshing

out the transactional details of his plan. Approximately 3

months later in July 1988, CGF made distributions to its

shareholders and formed five limited partnerships with the CGF

Family Trusts. Then in early October 1988, at one of Lincoln's

board meetings, Mr. Page moved that Lincoln purchase term

interests in up to five additional partnerships. He also moved

to have Lincoln declare another dividend. The dividend distribu-

tion took place on October 31 and approximately 1 month later on

December 9, 1988, Lincoln and the Lincoln Family Trusts created

five more partnerships.

This chronology of events shows a definite pattern. Each

time petitioners formed partnerships and acquired term interests

therein, distributions were paid so that their shareholders

could, likewise, invest in such partnerships and acquire the
 - 38 -

remainder interests. This, of course, was no mere coincidence.

Rather, it was one of a series of steps, the cumulative effect

being to generate amortization deductions.

Generally, this series of events occurred as follows.17

First, members of petitioners' boards of directors authorized the

purchase of term interests in partnerships. Second, petitioners

declared cash dividend distributions and/or stock redemptions

while, at the same time, liquidating a substantial portion of

their assets in U.S. Government securities, either directly or

through capital withdrawals in partnerships so investing. Then

petitioners formed limited partnerships by taking back term

interests therein, while the Family Trusts simultaneously took

back the remainders. Lastly, while petitioners began offsetting

their distributive shares of partnership income with amortization

and other deductions attributable to their term interests, the

Family Trusts waited in the wings for their remainder interests

to vest in possession without the incidence of taxation.

It is apparent that the transfers of funds to the Family

Trusts and their purchases shortly thereafter of remainder

interests in the limited partnerships constituted integrated

transactions intended to move assets from petitioners to the

Family Trusts with favorable tax consequences. Petitioners'

distributions to the Family Trusts, followed by the formation of

the CGF and Lincoln Partnerships, were not unconnected

17
We note that the exact order may vary somewhat depending
upon whether reference is made to CGF or Lincoln.
 - 39 -

transactions. Rather, they represented very important steps in

the series. Absent the initial step of distributing funds to the

Family Trusts, the remaining steps of forming the CGF and Lincoln

Partnerships, and of petitioners' acquiring the term interests

and the Family Trusts' acquiring the remainders, could not have

been successfully accomplished. Indeed, the creation of these

partnerships was necessary to achieve petitioners' intended end

result, which was to funnel large amounts of money outside of

petitioners' corporate structure and into the hands of their

shareholders while enjoying favorable tax treatment. The

intention to bring about this end result is manifested in

Robert A. Page's letters and in the minutes of petitioners' board

meetings. On the basis of the stipulated factual record, we

conclude that, in spite of the form in which the joint investment

transaction was cast, its substance shows petitioners acquiring

partnership interests B in their entirety and then carving out

remainder interests for the benefit of the Family Trusts.

It bears noting that, in his letter of May 15, 1986,

Mr. Page wrote of a potential pitfall which could thwart the

success of his plan; i.e., where the term interest holder funds

the remaindermen with the amounts necessary to obtain their

interests. In that situation, he warned, petitioners would be

viewed as acquiring the entire interest and then transferring the

remainders to their shareholders, in which case the otherwise

favorable tax results stemming from the amortization deductions

would disappear. Mr. Page's solution to this "limiting factor,"
 - 40 -

as he called it, was to have the corporation distribute dividends

so that its shareholders would be regarded as independently

investing the after-tax proceeds in the CGF and Lincoln Partner-

ships.

The court in Kornfeld v. Commissioner, 137 F.3d 1231 (10th

Cir. 1998), addressed this very point. In that case, where the

remaindermen had no legal obligation to use the funds provided by

the taxpayer to acquire their interests,18 the court did not

regard Gordon v. Commissioner, 85 T.C. 309 (1985), as distin-

guishable. The court noted that Mr. Kornfeld's intention in

making the gifts was to enable the donees to purchase the

remainder interests. And as the Court of Appeals for the Tenth

Circuit pointed out: "there is no reason these remaindermen

would question making the investments when taxpayer was giving

them the funds to make their purchases." Kornfeld v. Commis-

sioner, supra at 1236. Similarly, in Gordon v. Commissioner,

supra, the Court emphasized the parties' actual intent when it

addressed this argument in a footnote:

We reject petitioners' argument that the fact that
the trust was free to refuse to participate in any or
all of the joint purchase transactions indicates that
the trust's role as purchaser had substance. For
purposes of this question, the power to refuse is a
fact to consider * * * but is of minimal significance

18
In Kornfeld v. Commissioner, 137 F.3d 1231 (10th Cir.
1998), gift tax returns were filed in respect of all the funds
provided by Mr. Kornfeld to his daughters and secretary, whereas
in Gordon v. Commissioner, 85 T.C. 309 (1985), most of the
transfers of funds by Dr. Gordon to the family trust (holder of
the remainder interests) were not reflected in any gift tax
returns.
 - 41 -

where, as here, the facts reveal that the entire
transaction was set up around the expectation that the
joint implementation of Gordon's investment strategy
would occur. * * * [Id. at 331 n.16.]

Petitioners also attempt to focus our attention on the fact

that only a part of their distributions was used by the Family

Trusts to invest in the limited partnerships. Advancing what is

essentially the same argument as above, petitioners contend that

each trust exercised its separate discretion in deciding whether,

and to what extent, it would participate in Mr. Page's joint

investment scheme. Thus, they would have us treat their distri-

butions separately from the actual joint purchases and would have

us regard the remainder acquisitions as the result of the Family

Trusts' independent investment decisions. While we recognize

that petitioners' distribution amounts did not accord absolutely

with the amounts subsequently invested by the Family Trusts in

the limited partnerships, there was substantial overlapping. In

the case of CGF, $7,977,586 was transferred to the CGF Family

Trusts within 2 months of the trusts' investing $5,928,810 in the

CGF Partnerships. In the case of Lincoln, $5,440,000 in stock

redemptions was distributed to the Lincoln Family Trusts in March

1988, the same month in which those trusts subsequently invested

$3,287,774 in the first four Lincoln Partnerships created. In

October 1988, Lincoln distributed $3,998,678 in dividends to

those Family Trusts, which subsequently invested $3,449,342 in

the last five Lincoln Partnerships formed in early December.
 - 42 -

The close identity of funds moving from petitioners to the

Family Trusts and in turn to the CGF and Lincoln Partnerships,19

coupled with the close proximity in time in which this occurred,

suggests that the distribution amounts were intended all along to

be used in the joint investment transactions. We are hard

pressed to believe that the Family Trusts would have agreed to

engage in such transactions without having first received

petitioners' distributions shortly before acquiring their

remainder interests.

Likewise, in Gordon v. Commissioner, supra, there was not

complete identity in the amounts transferred to the trust and the

amount subsequently invested by the trust in the remainder

interest. For example, in one of the tax years at issue,

Dr. Gordon deposited at least $78,141 in the trust's savings

account, and the trust subsequently withdrew $47,592 to purchase

a remainder interest in tax-exempt bonds, while in the next year,

Dr. Gordon deposited at least $58,100 in its savings account, and

the trust withdrew $97,853 to buy its remainder interest. We

were satisfied, however, that "the trust appears to have been

funded for little purpose other than to participate with Dr. Gor-

don in the implementation of his bond acquisition strategy, a

fact that further indicates that Dr. Gordon should be treated as

the true purchaser of the whole bonds." Id. at 329.

19
If the after-tax proceeds of the distributions are
compared with the amounts used to purchase the remainder
interests, the numbers should align even more closely.
 - 43 -

Petitioners argue that Richard Hansen Land, Inc. v. Commis-

sioner, T.C. Memo. 1993-248, supports their amortization of the

term interests. That case, however, is distinguishable. As

stated earlier, a few very pertinent facts set apart Richard

Hansen Land, Inc. v. Commissioner, supra, from the cases at bar.

First, the corporation's payment of wages to Mr. Hansen was a

separate and distinct transaction, one whose bona fides were

never questioned by the Commissioner. Id. The payment of wages

represented an ordinary and recurring part of the farming

corporation's business. By way of contrast, CGF and Lincoln

undertook redemptions and declared dividends as part of a plan to

provide funds for the purchase of the remainder interests.

Indeed, as Mr. Page described the plan: "The major portion of

the funds for the purchase of the remainder interest * * * is

provided from the after-tax proceeds of a[n] * * * extraordinary

dividend". Generally speaking, a dividend is defined as

extraordinary when it is unusual in amount and paid at an

irregular time because of a particular corporate event. Black's

Law Dictionary 587 (6th ed. 1990). Petitioners' distributions,

occurring within months of the limited partnerships' being

formed, were far from being recurring events in the cycle of

corporate operations; rather, they were extraordinary, nonrecur-

ring distributions that were made for a specific purpose as part

of a prearranged plan.

The nature of the underlying transaction also serves to

distinguish Richard Hansen Land, Inc. v. Commissioner, supra,
 - 44 -

from the present cases. The taxpayer and Mr. Hansen jointly

purchased a parcel of land which the corporation planted,

harvested, and attended to in a manner typical of other farm

corporations in the area. In the instant cases, petitioners and

the Family Trusts jointly formed limited partnerships with

petitioners owning, albeit indirectly, virtually the same assets

that petitioners had previously owned outright; i.e., Federal

Government bonds. More specifically, petitioners liquidated

their interests in U.S. Government securities, held directly or

through Net Venture, in order to fund the distributions made to

their shareholders. Subsequently, petitioners acquired term

interests in the limited partnerships which, in turn, reinvested

petitioners' funds in entities such as Net Venture and Gopher

Fund——investment partnerships owning U.S. Government obligations.

Unlike in Kornfeld v. Commissioner, 137 F.3d 1231 (10th Cir.

1998), Gordon v. Commissioner, 85 T.C. 309 (1985), and Richard

Hansen Land, Inc. v. Commissioner, supra, where consideration

moved to a third party, in the instant cases, funds remained

within the same family group. For example, in the case of

Lincoln, the amounts contributed by Lincoln and the Lincoln

Family Trusts to the Lincoln Partnerships, if viewed as an

aggregate of all the members, can aptly be described as transfers

of money from that family's front pocket to its back pocket.

This makes the case against petitioners even stronger; here,

related parties obtained tax benefits without making any outlays

of money to third parties. A mere shuffling around of income
 - 45 -

within the same family group would, petitioners had hoped, bring

about the favorable tax consequences which they had planned for 2

years earlier.

Unquestionably, what we have here is a tax scheme in the

form of joint partnership investments. Without disturbing the

character of their investment portfolio to any great extent,

petitioners acquired term interests in limited partnerships as

vehicles for creating tax deductions and for transferring income

to the Family Trusts at favorable tax rates. Petitioners'

amortization deductions of their term interests in the CGF and

Lincoln Partnerships were simply the last step in a series of

prearranged transactions designed from the outset to achieve

their intended result. In these circumstances, where the

evidence overwhelmingly supports this finding, we add that the

fact that the Family Trusts paid taxes on the distributions they

received from petitioners is not, in and of itself, sufficient to

distinguish the present cases from Gordon v. Commissioner, supra,

and Kornfeld v. Commissioner, supra.20 The Court recognizes

that, in Richard Hansen Land, Inc. v. Commissioner, supra,

Mr. Hansen received wheat from his corporation and reported its

value as wages on his Federal income tax return. However, as

20
In Gordon v. Commissioner, 85 T.C. 309 (1985), no payment
of taxes was made because Dr. Gordon failed consistently to treat
as gifts the bulk of his cash transfers to the family trust. In
Kornfeld v. Commissioner, 137 F.3d 1231 (10th Cir. 1998), while
Mr. Kornfeld did file gift tax returns reflecting the gifts to
the remaindermen, he paid no tax on account of the unified
credit. Sec. 2505.
 - 46 -

shown above, the wages were earned by and paid to him in the

ordinary course of the corporation's business. The factual

circumstances in Richard Hansen Land, Inc. v. Commissioner,

supra, are distinguishable from the cases at bar. Here, the

amounts distributed to the Family Trusts were calculated to take

into account the after-tax proceeds that would remain available

for their use in the joint asset purchases. Robert A. Page, as

engineer of the plan, left little to chance. What we have before

us is a purely tax-motivated scheme in the form of joint asset

acquisitions for the purpose of transferring assets from peti-

tioners to the Family Trusts with minimal tax liability. As the

court in Saviano v. Commissioner, 765 F.2d 643, 654 (7th Cir.

1985), affg. 80 T.C. 955 (1983), recognized:

The freedom to arrange one's affairs to minimize taxes
does not include the right to engage in financial
fantasies with the expectation that the Internal
Revenue Service and the courts will play along. The
Commissioner and the courts are empowered, and in fact
duty-bound, to look beyond the contrived forms of
transactions to their economic substance and to apply
the tax laws accordingly. That is what we have done in
this case and that is what taxpayers should expect in
the future.

We are satisfied that, on the basis of the record as a

whole, petitioners acquired entire interests in the CGF and

Lincoln Partnerships and then transferred the remainder interests

therein to the Family Trusts. Accordingly, using Kornfeld v.

Commissioner, supra, Lomas Santa Fe, Inc. v. Commissioner, 693

F.2d 71 (9th Cir. 1982), United States v. Georgia R.R. & Banking

Co., 348 F.2d 278 (5th Cir. 1965), and Gordon v. Commissioner,
 - 47 -

supra, we sustain respondent's disallowance of petitioners'

amortization deductions as determined in the notices of

deficiency.21

To reflect the foregoing and concessions by respondent,

Decisions will be entered

under Rule 155.

21
Given our holding herein, we offer no opinion on whether,
as respondent contends, amortizing term interests in partnerships
is inconsistent with the principles of subch. K. We also need
not decide whether petitioners' argument based on the clear
reflection of income principle, raised for the first time in
their opening brief, was made too late to be considered. See
Aero Rental v. Commissioner, 64 T.C. 331, 338 (1975); Greenberg
v. Commissioner, 25 T.C. 534, 537 (1955).
 - 48 -

APPENDIX A

CGF One, L.P.

Type of Interest Contribution

Partnership Interest A
Ruth G. Fink Trust Number One $3,277

Partnership Interest B--Term
CGF Industries, Inc. 2,011,312

Partnership Interest B--Remainder
H. Bernerd Fink Revocable Trust 12,620
Ruth G. Fink Trust Number One 328,121
Ruth G. Fink Trust Number Three 12,620
Ruth G. Fink Trust Number Four 12,620
Ruth G. Fink Trust Number Five 12,620
Ruth G. Fink Partnership 403,841
Ruth G. Fink Partnership Number Two 201,921
Ruth G. Fink Charitable Trust Number One 277,641

CGF Two, L.P.

Partnership Interest A
Marcia F. Anderson Trust Number One 2,962

Partnership Interest B--Term
CGF Industries, Inc. 1,817,938

Partnership Interest B--Remainder
Marcia F. Anderson Revocable Trust 330,794
Robert J. Anderson Revocable Trust 34,220
Jane E. Anderson Revocable Trust 193,914
Nancy J. Anderson Revocable Trust 193,914
Robert J. Anderson, Custodian 193,914
Marcia F. Anderson Trust Number One 193,914

Santa Fe Partners, L.P.
Partnership Interest A
Caroline A. Cochener Trust Number Five 3,690

Partnership Interest B--Term
CGF Industries, Inc. 2,265,250

Partnership Interest B--Remainder
Caroline A. Cochener Trust 568,535
Caroline A. Cochener Trust Number Two 284,268
Caroline A. Cochener Revocable Trust 284,268
Bruce M. Bolene Revocable Trust 284,268
 - 49 -

Cloud Grey, L.P.

Type of Interest Contribution

Partnership Interest A
Diana C. Broze Trust Number Five $3,690

Partnership Interest B--Term
CGF Industries, Inc. 2,265,250

Partnership Interest B--Remainder
Diana C. Broze Revocable Trust 426,401
Vincent J. Broze Revocable Trust 28,427
Joaquin Mason Trust Number One 127,920
Joaquin Mason Trust Number Two 56,854
Vincent J. Broze, Custodian 127,920
Diana C. Broze Trust Number Three 28,427
Diana C. Broze Trust Number Four 28,427
Diana C. Broze Trust Number Five 28,427
Diana C. Broze Trust Number Six 568,535

Alpha One, L.P.

Partnership Interest A
Alpha, L.P., a Kansas Ltd. Partnership}
Bruce G. Cochener Trust Number Three } 3,690

Partnership Interest B--Term
CGF Industries, Inc. 2,265,250

Partnership Interest B--Remainder
Alpha, L.P. 1,421,338
 - 50 -

APPENDIX B

Lincoln Partnership #1, L.P.

Type of Interest Contribution

Partnership Interest A
Georgia L. Johnson Revocable Trust $2,444

Partnership Interest B--Term
Lincoln Industries, Inc. 1,500,000

Partnership Interest B--Remainder
Georgia L. Johnson Trust Number Four 2,441
Georgia L. Johnson Revocable Trust 938,739

Lincoln Partnership #2, L.P.

Partnership Interest A
Lincoln Family Trust Number Two 2,444

Partnership Interest B--Term
Lincoln Industries, Inc. 1,500,000

Partnership Interest B--Remainder
Edward M. Lincoln Revocable Trust 117,647
Edward M. Lincoln Trust Number Two 235,295
Edward M. Lincoln Trust Number Three 235,295
Edward M. Lincoln Trust Number Seven 117,647
Lincoln Family Trust Number Two 235,295

Lincoln Partnership #3, L.P.

Partnership Interest A
Margaret L. Donlan Trust Number Four 2,444

Partnership Interest B--Term
Lincoln Industries, Inc. 1,500,000

Partnership Interest B--Remainder
Margaret L. Donlan Revocable Trust 739,782
Margaret L. Donlan Trust Number Five 201,397
 - 51 -

HFC Partnership, L.P.

Type of Interest Contribution

Partnership Interest A
Lincoln Family Trust Number Four $24,657

Partnership Interest B--Term
Lincoln Industries, Inc. 1,500,000

Partnership Interest B--Remainder
Ann L. Hunter Trust Number Two 37,640
Lincoln Family Trust Number Four 903,369

Lincoln 88 Partnership, L.P.

Partnership Interest A
Olivia G. Lincoln Revocable Trust 39,865

Partnership Interest B--Term
Lincoln Industries, Inc. 3,360,000

Partnership Interest B--Remainder
Olivia G. Lincoln Revocable Trust 170,127
Olivia G. Lincoln Trust Number One 82,130
Olivia G. Lincoln Trust Number Two 82,130
Olivia G. Lincoln Trust Number Three 82,130
Olivia G. Lincoln Trust Number Four 82,130
George A. Lincoln Trust Number One 29,332
George A. Lincoln Trust Number Two 29,332
George A. Lincoln Trust Number Three 29,332

Lincoln Partnership #11, L.P.

Partnership Interest A
Georgia L. Johnson Trust Number Four 52,323

Partnership Interest B--Term
Lincoln Industries, Inc. 4,410,000

Partnership Interest B--Remainder
Georgia L. Johnson Revocable Trust 269,490
Georgia L. Johnson Trust Number Two 223,292
Lincoln Partnership #1, L.P. 277,190
 - 52 -

Two Thousand Eight Partnership, L.P.

Type of Interest Contribution

Partnership Interest A
Lincoln Family Trust Number Two $52,323

Partnership Interest B--Term
Lincoln Industries, Inc. 4,410,000

Partnership Interest B--Remainder
Edward M. Lincoln Revocable Trust 123,196
Edward M. Lincoln Trust Number Two 19,249
Edward M. Lincoln Trust Number Three 160,154
Edward M. Lincoln Trust Number Four 46,198
Edward M. Lincoln Trust Number Five 115,496
Edward M. Lincoln Trust Number Six 200,193
Lincoln Family Trust Number Two 105,486

Donlan Partnership #1, L.P.

Partnership Interest A
Margaret L. Donlan Trust Number Four 52,323

Partnership Interest B--Term
Lincoln Industries, Inc. 4,410,000

Partnership Interest B--Remainder
Margaret L. Donlan Revocable Trust 415,785
Margaret L. Donlan Trust Number Two 121,271
Margaret L. Donlan Trust Number Three 115,496
Margaret L. Donlan Trust Number Five 117,421

HFC2 Partnership, L.P.

Partnership Interest A
Lincoln Family Trust Number Four 52,323

Partnership Interest B--Term
Lincoln Industries, Inc. 4,410,000

Partnership Interest B--Remainder
Ann L. Hunter Revocable Trust 269,490
Ann L. Hunter Trust Number Three 307,989
Ann L. Hunter Trust Number Four 153,994
Ann L. Hunter Trust Number Twenty-six 38,499
 - 53 -

APPENDIX C

Mar. 31, 1989
Net Venture Gopher Fund Lake Union GAR Ninety
CGF One, L.P. $2,070,705 $1,130,652 -0- $160,533
(61.59%) (33.63%) (4.78%)
CGF Two, L.P. 2,022,499 1,027,866 -0- -0-
(66.30%) (33.7%)
Santa Fe Partners, 2,988,503 611,580 -0- 185,633
L.P. (78.91%) (16.15%) (4.90%)
Cloud Grey, L.P. 2,521,763 1,269,414 -0- -0-
(66.52%) (33.48%)
Alpha One, L.P. 2,773,864 1,021,352 -0- -0-
(73.09%) (26.91%)

Mar. 31, 1990

CGF One, L.P. 2,017,861 1,226,376 200,000 160,401
(55.98%) (34.02%) (5.55%) (4.45%)
CGF Two, L.P. 2,000,075 1,070,434 200,000 -0-
(61.15%) (32.73%) (6.12%)
Santa Fe Partners, 2,771,255 1,000,664 -0- 185,478
L.P. (68.99%) (24.91%) (4.62%)
Cloud Grey, L.P. 2,484,951 1,295,159 300,000 -0-
(60.90%) (31.74%) (7.35%)
Alpha One, L.P. 1,966,100 497,001 600,000 605,404
(49.54%) (12.52%) (15.12%) (15.25%)

Mar. 31, 1991

CGF One, L.P. 1,947,650 1,247,076 200,662 162,150
(54.75%) (35.05%) (5.64%) (4.56%)
CGF Two, L.P. 1,942,005 1,103,451 200,663 -0-
(59.83%) (33.99%) (6.18%)
Santa Fe Partners, 2,405,738 1,048,279 -0- 187,545
L.P. (60.33%) (26.29%) (4.70%)
Cloud Grey, L.P. 2,405,300 1,313,817 300,993 -0-
(59.83%) (32.68%) (7.49%)
Alpha One, L.P. 1,144,804 131,784 601,986 612,529
(31.44%) (3.62%) (16.53%) (16.82%)

Mar. 31, 1992

CGF One, L.P. 1,888,475 1,294,523 185,433 158,983
(53.54%) (36.70%) (5.26%) (4.51%)
CGF Two, L.P. 1,894,917 1,138,216 185,435 -0-
(58.87%) (35.36%) (5.76%)
Santa Fe Partners, 1,727,296 1,690,132 -0- 183,803
L.P. (43.65%) (42.71%) (4.65%)
Cloud Grey, L.P. 2,344,095 1,353,309 278,151 -0-
(58.96%) (34.04%) (7.00%)
Alpha One, L.P. 605,378 6,400 556,301 339,630
(18.65%) (.20%) (17.14%) (10.46%)
 - 54 -

APPENDIX D

Mar. 31, 1989
Gill
Net Gopher Industries, Falcon
Venture Fund L.P. Fund

Lincoln Partnership #1, L.P. $2,295,308 -0- -0- -0-
(89%)

Lincoln Partnership #2, L.P. 2,573,908 -0- -0- -0-
(100%)

Lincoln Partnership #3, L.P. 2,574,495 -0- -0- -0-
(100%)

HFC Partnership, L.P. 2,572,154 -0- -0- -0-
(100%)

Lincoln 88 Partnership, L.P. 4,005,510 -0- -0- -0-
(100%)

Lincoln Partnership #11, L.P. 5,278,795 -0- -0- -0-
(100%)

Two Thousand Eight Partnership, L.P. 5,239,295 -0- -0- -0-
(100%)

Donlan Partnership #1, L.P. 5,239,295 -0- -0- -0-
(100%)

HFC2 Partnership, L.P. 5,189,295 -0- -0- -0-
(100%)

Mar. 31, 1990
Lincoln Partnership #1, L.P. 2,344,260 -0- -0- -0-
(89%)

Lincoln Partnership #2, L.P. 2,608,416 -0- -0- -0-
(100%)

Lincoln Partnership #3, L.P. 2,519,273 -0- -0- -0-
(97%)

HFC Partnership, L.P. 1,315,254 $300,830 $768,644 -0-
(52%) (12%) (31%)

Lincoln 88 Partnership, L.P. 4,306,465 -0- -0- -0-
(100%)

Lincoln Partnership #11, L.P. 5,662,646 -0- -0- -0-
(100%)

Two Thousand Eight Partnership, L.P. 5,661,210 -0- -0- -0-
(100%)

Donlan Partnership #1, L.P. 5,640,410 -0- -0- -0-
(100%)

HFC2 Partnership, L.P. 2,843,922 601,660 1,537,288 -0-
(54%) (11%) (29%)
 - 55 -

Mar. 31, 1991
Gill
Net Gopher Industries, Falcon
Venture Fund L.P. Fund

Lincoln Partnership #1, L.P. $2,335,433 -0- -0- -0-
(89%)

Lincoln Partnership #2, L.P. 160,650 -0- -0- $2,251,000
(6%) (86%)

Lincoln Partnership #3, L.P. 2,500,084 -0- -0- -0-
(100%)

HFC Partnership, L.P. 1,073,125 $547,863 $695,483 -0-
(44%) (22%) (28%)

Lincoln 88 Partnership, L.P. 3,932,136 -0- -0- -0-
(91%)

Lincoln Partnership #11, L.P. 5,663,261 -0- -0- -0-
(100%)

Two Thousand Eight Partnership, L.P. 145,496 -0- -0- 5,465,000
(3%) (97%)

Donlan Partnership #1, L.P. 5,304,234 -0- -0- -0-
(95%)

HFC2 Partnership, L.P. 2,204,380 1,095,727 1,390,967 -0-
(42%) (21%) (26%)

Mar. 31, 1992

Lincoln Partnership #1, L.P. 1,301,765 693,050 -0- 301,518
(51%) (27%) (12%)

Lincoln Partnership #2, L.P. 1,640,030 -0- -0- 762,301
(63%) (29%)

Lincoln Partnership #3, L.P. 1,305,818 1,191,836 -0- -0-
(52%) (48%)

HFC Partnership, L.P. 1,034,352 566,257 665,673 -0-
(42%) (23%) (27%)

Lincoln 88 Partnership, L.P. 3,837,320 -0- -0- -0-
(89%)

Lincoln Partnership #11, L.P. 5,615,134 -0- -0- -0-
(100%)

Two Thousand Eight Partnership, L.P. 1,859,255 -0- -0- 3,766,238
(33%) (67%)

Donlan Partnership #1, L.P. 2,617,115 2,572,652 -0- -0-
(47%) (46%)

HFC2 Partnership, L.P. 1,659,426 1,133,910 1,331,345 -0-
(32%) (22%) (25%)
 - 56 -

Mar, 31, 1993
Gill
Net Gopher Industries, Falcon
Venture Fund L.P. Fund

Lincoln Partnership #1, L.P. $918,338 $689,373 -0- $646,302
(36%) (27%) (26%)

Lincoln Partnership #2, L.P. 1,582,013 -0- -0- 798,356
(61%) (31%)

Lincoln Partnership #3, L.P. 1,227,878 1,218,243 -0- -0-
(50%) (50%)

HFC Partnership, L.P. 1,071,313 586,284 $711,263 -0-
(42%) (23%) (28%)

Lincoln 88 Partnership, L.P. 3,398,414 -0- -0- -0-
(88%)

Lincoln Partnership #11, L.P. 5,608,393 -0- -0- -0-
(100%)

Two Thousand Eight Partnership, L.P. 3,629,269 -0- -0- 1,940,994
(65%) (35%)

Donlan Partnership #1, L.P. 2,457,021 2,619,070 -0- -0-
(45%) (48%)

HFC2 Partnership, L.P. 1,694,779 1,163,864 1,422,525 -0-
(32%) (22%) (27%)