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. 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- 2 -

through 1992 taxable years, CGF was the common parent of an affiliated group of corporations making a consolidated return ofincome. By notices of deficiency respondent determined deficiencies 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 incorporated 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 Practiceand Procedure, and dollar amounts have been rounded to the nearest dollar, unless otherwise indicated. The facts necessary for an understanding of these cases are as follows. Background of CGFCGF, a Kansas corporation since 1972, maintains its principal 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 -

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, withfamily members, within the meaning of sec. 318(a)(1)(A), as beneficiaries 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).

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- 5 -

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 familymembers, within the meaning of sec. 318(a)(1)(A), are the beneficiaries. There are also trusts in the names of their four children, whose surnames are Johnson, Lincoln, Donlan, and Hunter. (continued...) 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- 6 -

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 handfulof family trusts. According to the trust agreements, the successor 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 tomean a situation where person A and person B, for example, simultaneously acquire a present and a future interest in property, respectively. The Solicitation By letter dated May 15, 1986, and an addendum dated March 30, 1988, Robert A. Page 4 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 purchase 5 was twofold: (1) To transmit property to future generations without incurring a transfer tax- 7 -

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...) 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 corporation 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 fundthe remainder interest purchase. Mr. Page warned that "Simultaneous 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- 8 -

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. 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 corporation purchased a term of years in such newly created partnerships, its shareholders, in turn, would purchase the remainderinterests. Attached to the letter, Mr. Page provided a partnership 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- 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 * * * [thecorporation] at an approximate 14% tax rate. In addition, 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 -

8 On July 22, 1988, by resolution of CGF's board of directors, 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. 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- 11 -

the CGF Partnerships and their respective contribution amounts is attached to this opinion as appendix A.The CGF partnership agreements provided that each partnership'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 partnershipagreements also required each partnership to make annual distributions 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 Partnership CGF One, L.P. CGF Two, L.P. Santa Fe Partners, L.P. Cloud Grey, L.P. Alpha One, L.P. Total CGF Contribution $2,011,312 1,817,938 2,265,250 2,265,250 2,265,250 10,625,000 Trust Contribution $1,265,282 1,143,632 1,425,028 1,425,028 1,425,028 6,683,998 Total

$3,276,594 2,961,570 3,690,278 3,690,278 3,690,278 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.

Recipient H. Bernerd Fink Revocable Trust Ruth G. Fink Trust Number One Ruth G. Fink Charitable Trust Number One Ruth G. Fink Partnership, 1 Ruth G. Fink Revocable Trust, Partner Total June 15, 1988 Redemption (Pretax) -0- -0- -0- -0- July 28, 1988

Redemption (Pretax) -0- -0- -0- -0- July 29, 1988

Dividend (Pretax) $11,680 435,311 15,427 1,793 Total

$11,680 435,311 15,427 1,793 464,211 Partnership

Contribution Amount $12,620 328,121 277,641 1,290 619,672
CGF Two, L.P.

Marcia F. Anderson Revocable Trust Robert J. Anderson Revocable Trust Jane E. Anderson Revocable Trust Nancy J. Anderson Revocable Trust Robert J. Anderson, Custodian for Susan M. Anderson Marcia F. Anderson Trust Number One Total $255,145 51,315 163,680 163,680 163,680 302,500 $230,890 -0- -0- -0- -0- -0- 14,060

-0- 130,545 130,657 130,657 -0- 500,095

51,315 294,225 294,337 294,337 302,500 1,736,809 330,794

34,220 193,914 193,914 193,914 193,914 1,140,670
Santa Fe Partners, L.P.

Caroline A. Cochener Trust Caroline A. Cochener Trust Number Two Caroline A. Cochener Revocable Trust Bruce M. Bolene Revocable Trust Total 127,380 -0- 706,365 8,635 221,650

201,190 -0- -0- 127,836

216,871 38,047 2,532 476,866

418,061 744,412 11,167 1,650,506 568,535

284,268 284,268 284,268 1,421,339 Cloud Grey, L.P.

Diana C. Broze Revocable Trust Vincent J. Broze Revocable Trust Joaquin Mason Trust Number One Joaquin Mason Trust Number Two Vincent J. Broze, Custodian for Joaquin D. Mason Diana C. Broze Trust Number Three Diana C. Broze Trust Number Four Diana C. Broze Trust Number Five Diana C. Broze Trust Number Six Total -0- -0- -0- -0- -0- -0- -0- -0- 1,100,000 188,320 8,635 115,940 -0- 187,550 -0- -0- -0- -0- 86,458

10,127 40,885 144 53,225 108,448 54,224 151,827 -0- 274,778

18,762 156,825 144 240,775 108,448 54,224 151,827 1,100,000 2,105,783 426,401

28,427 127,920 56,854 127,920 28,427 28,427 28,427 568,535 1,421,338 Alpha One, L.P.
Alpha, L.P., 1 Curmudgeon Revocable Trust, Partner Nancy M. Cochener Revocable Trust, Partner Bruce G. Cochener Trust Number One, Partner Bruce G. Cochener Trust Number Two, Partner Bruce G. Cochener Trust Number Three, Partner Bruce G. Cochener Trust Number Four, Partner Total Grand Total 277,695 12,705 587,620 -0- -0- -0- -0-

196,900 -0- -0- -0- 440,000 9,842 -0- 413,671 81,824 20 -0- 287,537

209,605 1,001,291 81,824 20 440,000 2,020,277 2 7,977,586 188,585

137,103 658,400 53,805 14 _ 287,884 1,325,791 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 -

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. OnMar. 28, 1988, Lincoln distributed $5,440,000 in stock redemptions, 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. 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- 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 terminterests in the remaining five Lincoln Partnerships (collectively 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 -

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...) Limited Partnership Lincoln Partnership #1, L.P. Lincoln Partnership #2, L.P. Lincoln Partnership #3, L.P. HFC Partnership, L.P. Lincoln 88 Partnership, L.P. Lincoln Partnership #11, L.P. Two Thousand Eight Partnership, L.P. Donlan Partnership #1, L.P. HFC2 Partnership, L.P. Total Lincoln Contribution $1,500,000 1,500,000 1,500,000 1,500,000 3,360,000 4,410,000 4,410,000 4,410,000 4,410,000 27,000,000 Term

Interest 10 years 10 years 10 years 10 years 20 years 20 years 20 years 20 years 20 years Trust

Contribution $941,180 941,180 941,180 941,009 586,645 769,972 769,972 769,972 769,972 7,431,082 Total

$2,441,180 2,441,180 2,441,180 2,441,009 3,946,645 5,179,972 5,179,972 5,179,972 5,179,972 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 investment in Net Venture, a partnership investing solely in U.S. Government obligations. 11 See discussion of Net Venture, infra

.- 18 -

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. The following is a summary of Lincoln's distribution activity andthe corresponding contribution amounts paid by Lincoln's shareholders for their remainder interests in the Lincoln Partnerships:- 19 -

Lincoln Partnership #1, L.P.

Recipient Georgia L. Johnson Revocable Trust Georgia L. Johnson Trust Number Four Total Jan. 1988 Call Option (Pretax) $1,164,295 -0- Mar. 1988

Redemption (Pretax) $1,360,000 -0- June 1988

Dividend (Pretax) $45,163 24,587 Oct. 1988

Dividend (Pretax) $249,314 122,936 Total

$2,818,772 147,523 2,966,295 Partnership

Contribution Amount $938,739 2,441 941,180 Lincoln Partnership #2, L.P. Edward M. Lincoln Revocable Trust Edward M. Lincoln Trust Number Two Edward M. Lincoln Trust Number Three Edward M. Lincoln Trust Number Seven Lincoln Family Trust Number Two Total 1,170,235 -0- -0- -0- -0- 474,028

35,972 -0- 510,000 340,000 45,829

4,766 47,511 -0- 38,895 252,642

23,831 237,558 -0- 194,475 1,942,734

64,569 285,069 510,000 573,370 3,375,742 117,647

235,295 235,295 117,647 235,295 941,179 Lincoln Partnership #3, L.P. Margaret L. Donlan Revocable Trust Margaret L. Donlan Trust Number Five Total 675,235 495,000 1,360,000 -0- 45,559

-0- 251,293

-0- 2,332,087

495,000 2,827,087 739,782

201,397 941,179 HFC Partnership, L.P. Ann L. Hunter Trust Number Two Lincoln Family Trust Number Four Total -0- -0- -0-

1,360,000 167

36,405 1,292

182,025 1,459

1,578,430 1,579,889 37,640

903,369 941,009 Lincoln 88 Partnership, L.P. Olivia G. Lincoln Revocable Trust Olivia G. Lincoln Trust Number One Olivia G. Lincoln Trust Number Two Olivia G. Lincoln Trust Number Three Olivia G. Lincoln Trust Number Four George A. Lincoln Trust Number One George A. Lincoln Trust Number Two George A. Lincoln Trust Number Three Total 1,358,170 -0- -0- -0- -0- -0- -0- -0- -0-

-0- -0- -0- -0- -0- -0- -0- 8,824

20,028 20,028 20,028 20,028 7,112 7,112 7,112 44,121

100,140 100,140 100,140 100,140 35,559 35,559 35,559 1,411,115

120,168 120,168 120,168 120,168 42,671 42,671 42,671 2,019,800 170,127

82,130 82,130 82,130 82,130 29,332 29,332 29,332 586,643 Lincoln Partnership #11, L.P. Georgia L. Johnson Revocable Trust Georgia L. Johnson Trust Number Two Total 1 -0- 1

-0- 1

53,465 1

267,327 1

320,792 320,792 269,490

223,292 492,782 Two Thousand Eight Partnership, L.P. Edward M. Lincoln Revocable Trust Edward M. Lincoln Trust Number Two Edward M. Lincoln Trust Number Three Edward M. Lincoln Trust Number Four Edward M. Lincoln Trust Number Five Edward M. Lincoln Trust Number Six Lincoln Family Trust Number Two Total 1 1 1 -0- -0- -0- 1 1 1 1 -0- -0- -0- 1 1 1 1 11,522 27,483 47,512 1 1 1 1 57,608 137,417 237,558

1 1 1 1 69,130 164,900 285,070

1 519,100 123,196

19,249 160,154 46,198 115,496 200,193 105,486 769,972 Donlan Partnership #1, L.P. Margaret L. Donlan Revocable Trust Margaret L. Donlan Trust Number Two Margaret L. Donlan Trust Number Three Margaret L. Donlan Trust Number Five Total 1 -0- -0- 1 1

-0- -0- 1 1

29,314 72,455 1 1

146,569 362,276

1 1

175,883 434,731

1 610,614 415,785

121,271 115,496 177,421 829,973 HFC2 Partnership, L.P. Ann L. Hunter Revocable Trust Ann L. Hunter Trust Number Three Ann L. Hunter Trust Number Four Ann L. Hunter Trust Number Twenty-six Total Grand Total 654,500 -0- -0- 605,000 -0- -0- -0- -0- 74,268

81,324 45,690 -0- 394,381

406,620 228,451 -0- 1,123,149

487,944 274,141 605,000 2,490,234 2 16,709,553 269,490

307,989 153,994 38,499 769,972 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 partnerships, 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: NetVenture, Gopher Fund, Lake Union Hotel Associates Ltd. Partnership (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 Partnerships, 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 corresponding 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 -

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. 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 shareholders. 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-- 22 -

term temporary investments in other fixed income type instruments." 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 -

CGF One, L.P. Income Expenses 1 Amortization expense Net income or loss CGF Two, L.P. Income Expenses 1 Amortization expense Net income or loss Santa Fe Partners, L.P. Income Expenses 1 Amortization expense Net income or loss Cloud Grey, L.P. Income Expenses 1 Amortization expense Net income or loss Alpha One, L.P. Income (or loss) Expenses 1 Amortization expense Net income or loss Mar. 31, 1989
$87,610 (9,113) (134,088) (55,591)

82,625 (7,044) (121,196) (45,615)

106,683 (10,453) (151,017) (54,787)

102,808 (10,336) (151,017) (58,545)

109,328 (8,045) (151,017) (49,734) Mar. 31,

1990
$247,242 (22,926) (201,131) 23,185

233,708 (19,828) (181,794) 32,086

294,733 (22,883) (226,525) 45,325

291,338 (24,333) (226,525) 40,480

281,435 (35,338) (226,525) 19,572 Mar. 31,

1991
$225,118 (21,654) (201,131) 2,333

214,574 (18,383) (181,794) 14,397

269,836 (24,046) (226,525) 19,265

264,831 (22,992) (226,525) 15,314

(42,355) (16,421) (226,525) (285,301) Mar. 31,

1992
$186,311 (20,373) (201,131) (35,193)

179,041 (18,147) (181,794) (20,900)

226,920 (22,453) (226,525) (22,058)

215,715 (21,873) (226,525) (32,683)

(280,272) (7,169) (226,525) (513,966) Totals

$746,281 (74,066) (737,481) (65,266)

709,948 (63,402) (666,578) (20,032)

898,172 (79,835) (830,592) (12,255)

874,692 (79,534) (830,592) (35,434)

68,136 (66,973) (830,592) (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 -

Lincoln Partnership #1, L.P. Income Expenses 1 Amortization expense Net income or loss Lincoln Partnership #2, L.P. Income Expenses Amortization expense Net income or loss Lincoln Partnership #3, L.P. Income Expenses 1 Amortization expense Net income or loss HFC Partnership, L.P. Income Expenses 1 Amortization expense Net income or loss Lincoln 88 Partnership, L.P. Income Expenses 1 Amortization expense Net income or loss Lincoln Partnership #11, L.P. Income Expenses 1 Amortization expense Net income or loss Two Thousand Eight Partnership, L.P. Income Expenses Amortization expense Net income or loss Donlan Partnership #1, L.P. Income Expenses 1 Amortization expense Net income or loss HFC2 Partnership, L.P. Income Expenses 1 Amortization expense Net income or loss Mar. 31, 1989
$149,050 (15,127) (150,000) (16,077)

149,136 (14,531) (150,000) (15,395)

149,038 (14,535) (150,000) (15,497)

149,060 (39,298) (150,000) (40,238)

26,756 (5,824) (42,000) (21,068)

57,738 (9,499) (55,125) (6,886)

11,181 (1,552) (55,125) (45,496)

11,181 (1,586) (55,125) (45,530)

11,226 (51,336) (55,125) (95,235) Mar. 31,

1990
$198,129 (13,252) (150,000) 34,877

221,869 (46,993) (150,000) 24,876

200,833 (30,951) (150,000) 19,882

125,176 (67,798) (150,000) (92,622)

343,078 (20,970) (168,000) 154,108

473,567 (41,996) (220,500) 211,071

469,729 (39,747) (220,500) 209,482

469,741 (60,338) (220,500) 188,903

267,163 (132,790) (220,500) (86,127) Mar. 31,

1991
$187,277 (12,476) (150,000) 24,801

209,500 (36,626) (150,000) 22,874

203,125 (52,987) (150,000) 138

48,272 (60,875) (150,000) (162,603)

356,683 (19,566) (168,000) 169,117

454,991 (25,881) (220,500) 208,610

454,248 (76,534) (220,500) 157,214

461,009 (91,066) (220,500) 149,443

137,798 (118,742) (220,500) (201,444) Mar. 31,

1992
$169,864 (34,994) (150,000) (15,130)

163,287 (36,584) (150,000) (23,297)

186,726 (46,259) (150,000) (9,533)

81,548 (60,994) (150,000) (129,446)

326,129 (18,513) (168,000) 139,616

422,188 (81,238) (220,500) 120,450

381,249 (76,202) (220,500) 84,547

423,668 (89,907) (220,500) 113,261

187,255 (118,573) (220,500) (151,818) Mar. 31,

1993
$116,424 (38,341) (150,000) (71,917)

129,907 (38,645) (150,000) (58,738)

127,427 (40,085) (150,000) (62,658)

139,338 (41,798) (150,000) (52,460)

284,163 (19,875) (168,000) 96,288

357,760 (82,297) (220,500) 54,963

302,874 (78,240) (220,500) 4,134

296,173 (75,460) (220,500) 213

287,858 (76,472) (220,500) (9,114) Totals

820,744 (114,190) (750,000) (43,446)

873,699 (173,379) (750,000) (49,680)

867,149 (184,817) (750,000) (67,668)

543,394 (270,763) (750,000) (477,369)

1,336,809 (84,748) (714,000) 538,061

1,766,244 (240,911) (937,125) 588,208

1,619,281 (272,275) (937,125) 409,881

1,661,772 (318,357) (937,125) 406,290

891,300 (497,913) (937,125) (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 entitledto recover their costs through amortization deductions. Petitioners 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 moneyfrom the corporations without the incidence of taxation. Respondent asserts that the transactions lacked business purpose andeconomic substance since petitioners had no reasonable expectation of making a profit. Respondent argues further that, since petitioners supplied a substantial portion of the money used toacquire the remainder interests, the substance of the transactions 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 -

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 terminterests acquired or created after July 27, 1989. Since petitioners' term interests were created before that date, sec. 167(e) is inapplicable to the present cases. attempted to create amortization deductions by impermissibly splitting nondepreciable assets; namely, partnership interests innewly created partnerships. Petitioners counter that the substance 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- 27 -

14 This rule is often referred to as the step transaction doctrine. 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 partnershipinterests, a type of property generally considered to be nonamortizable. 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 termand remainder interests in property, respectively. It is a wellsettled 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- 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); Griffiths 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 determinations solely because tax reasons affected the way in which petitioners structured the transaction, see Kornfeld v. Commissioner , 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 relatedparties in arranging their affairs in a manner devoid of legitimate 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 somewhatanalogous situation to the one at hand. Dr. Gordon, the taxpayer, 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 professionalshaving qualified pension or profit-sharing trusts. The arrangement called for joint purchases of tax-exempt bonds. The professional 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 substantial 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 interestsin tax-exempt bonds, while the family trust simultaneously purchased 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. Weheld that, while, in form, the taxpayer had acquired a depreciable 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 presidentof the corporation. Five months after incorporation, the taxpayer 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 thetransfer of wheat by * * * [the taxpayer] to Mr. Hansen represented 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 -

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.With the foregoing in mind, we must decide whether petitioners 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 concludethat petitioners acquired the full partnership interests outright, and that the rationale of Lomas Santa Fe, Inc. v. Commissioner , 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. Commissioner , 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.- 36 -

16 Joint asset acquisitions give rise to tax planning techniques 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 approximate14% tax rate." Respondent asserts that this multitiered transaction 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. 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- 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 movedto have Lincoln declare another dividend. The dividend distribution 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 -

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

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. as he called it, was to have the corporation distribute dividends so that its shareholders would be regarded as independentlyinvesting the after-tax proceeds in the CGF and Lincoln Partnerships. 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 distinguishable. 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. Commissioner , 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- 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 jointinvestment scheme. Thus, they would have us treat their distributions 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 -

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. 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 beenfunded for little purpose other than to participate with Dr. Gordon 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.- 43 -

Petitioners argue that Richard Hansen Land, Inc. v. Commissioner , 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 ofcorporate operations; rather, they were extraordinary, nonrecurring 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 -

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. 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- 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 assetacquisitions for the purpose of transferring assets from petitioners 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 -

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). 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
.- 48 -

APPENDIX A CGF One, L.P. Type of Interest Partnership Interest A Ruth G. Fink Trust Number One Partnership Interest B--Term CGF Industries, Inc. Partnership Interest B--Remainder H. Bernerd Fink Revocable Trust Ruth G. Fink Trust Number One Ruth G. Fink Trust Number Three Ruth G. Fink Trust Number Four Ruth G. Fink Trust Number Five Ruth G. Fink Partnership Ruth G. Fink Partnership Number Two Ruth G. Fink Charitable Trust Number One Contribution
$3,277

2,011,312

12,620 328,121 12,620 12,620 12,620 403,841 201,921 277,641

CGF Two, L.P. Partnership Interest A Marcia F. Anderson Trust Number One Partnership Interest B--Term CGF Industries, Inc. Partnership Interest B--Remainder Marcia F. Anderson Revocable Trust Robert J. Anderson Revocable Trust Jane E. Anderson Revocable Trust Nancy J. Anderson Revocable Trust Robert J. Anderson, Custodian Marcia F. Anderson Trust Number One 2,962

1,817,938

330,794 34,220 193,914 193,914 193,914 193,914

Santa Fe Partners, L.P. Partnership Interest A Caroline A. Cochener Trust Number Five Partnership Interest B--Term CGF Industries, Inc. Partnership Interest B--Remainder Caroline A. Cochener Trust Caroline A. Cochener Trust Number Two Caroline A. Cochener Revocable Trust Bruce M. Bolene Revocable Trust 3,690

2,265,250

568,535 284,268 284,268 284,268- 49 -
Cloud Grey, L.P. Type of Interest Partnership Interest A Diana C. Broze Trust Number Five Partnership Interest B--Term CGF Industries, Inc. Partnership Interest B--Remainder Diana C. Broze Revocable Trust Vincent J. Broze Revocable Trust Joaquin Mason Trust Number One Joaquin Mason Trust Number Two Vincent J. Broze, Custodian Diana C. Broze Trust Number Three Diana C. Broze Trust Number Four Diana C. Broze Trust Number Five Diana C. Broze Trust Number Six Contribution
$3,690

2,265,250

426,401 28,427 127,920 56,854 127,920 28,427 28,427 28,427 568,535

Alpha One, L.P. Partnership Interest A Alpha, L.P., a Kansas Ltd. Partnership} Bruce G. Cochener Trust Number Three } Partnership Interest B--Term CGF Industries, Inc. Partnership Interest B--Remainder Alpha, L.P. 3,690

2,265,250

1,421,338- 50 -

APPENDIX B Lincoln Partnership #1, L.P. Type of Interest Partnership Interest A Georgia L. Johnson Revocable Trust Partnership Interest B--Term Lincoln Industries, Inc. Partnership Interest B--Remainder Georgia L. Johnson Trust Number Four Georgia L. Johnson Revocable Trust Contribution
$2,444

1,500,000

2,441 938,739
Lincoln Partnership #2, L.P. Partnership Interest A Lincoln Family Trust Number Two Partnership Interest B--Term Lincoln Industries, Inc. Partnership Interest B--Remainder Edward M. Lincoln Revocable Trust Edward M. Lincoln Trust Number Two Edward M. Lincoln Trust Number Three Edward M. Lincoln Trust Number Seven Lincoln Family Trust Number Two 2,444

1,500,000

117,647 235,295 235,295 117,647 235,295
Lincoln Partnership #3, L.P. Partnership Interest A Margaret L. Donlan Trust Number Four Partnership Interest B--Term Lincoln Industries, Inc. Partnership Interest B--Remainder Margaret L. Donlan Revocable Trust Margaret L. Donlan Trust Number Five 2,444

1,500,000

739,782 201,397- 51 -
HFC Partnership, L.P. Type of Interest Partnership Interest A Lincoln Family Trust Number Four Partnership Interest B--Term Lincoln Industries, Inc. Partnership Interest B--Remainder Ann L. Hunter Trust Number Two Lincoln Family Trust Number Four Contribution
$24,657

1,500,000

37,640 903,369
Lincoln 88 Partnership, L.P. Partnership Interest A Olivia G. Lincoln Revocable Trust Partnership Interest B--Term Lincoln Industries, Inc. Partnership Interest B--Remainder Olivia G. Lincoln Revocable Trust Olivia G. Lincoln Trust Number One Olivia G. Lincoln Trust Number Two Olivia G. Lincoln Trust Number Three Olivia G. Lincoln Trust Number Four George A. Lincoln Trust Number One George A. Lincoln Trust Number Two George A. Lincoln Trust Number Three 39,865

3,360,000

170,127 82,130 82,130 82,130 82,130 29,332 29,332 29,332
Lincoln Partnership #11, L.P. Partnership Interest A Georgia L. Johnson Trust Number Four Partnership Interest B--Term Lincoln Industries, Inc. Partnership Interest B--Remainder Georgia L. Johnson Revocable Trust Georgia L. Johnson Trust Number Two Lincoln Partnership #1, L.P. 52,323

4,410,000

269,490 223,292 277,190- 52 -
Two Thousand Eight Partnership, L.P. Type of Interest Partnership Interest A Lincoln Family Trust Number Two Partnership Interest B--Term Lincoln Industries, Inc. Partnership Interest B--Remainder Edward M. Lincoln Revocable Trust Edward M. Lincoln Trust Number Two Edward M. Lincoln Trust Number Three Edward M. Lincoln Trust Number Four Edward M. Lincoln Trust Number Five Edward M. Lincoln Trust Number Six Lincoln Family Trust Number Two Contribution
$52,323

4,410,000

123,196 19,249 160,154 46,198 115,496 200,193 105,486
Donlan Partnership #1, L.P. Partnership Interest A Margaret L. Donlan Trust Number Four Partnership Interest B--Term Lincoln Industries, Inc. Partnership Interest B--Remainder Margaret L. Donlan Revocable Trust Margaret L. Donlan Trust Number Two Margaret L. Donlan Trust Number Three Margaret L. Donlan Trust Number Five 52,323

4,410,000

415,785 121,271 115,496 117,421
HFC2 Partnership, L.P. Partnership Interest A Lincoln Family Trust Number Four Partnership Interest B--Term Lincoln Industries, Inc. Partnership Interest B--Remainder Ann L. Hunter Revocable Trust Ann L. Hunter Trust Number Three Ann L. Hunter Trust Number Four Ann L. Hunter Trust Number Twenty-six 52,323

4,410,000

269,490 307,989 153,994 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

Lincoln Partnership #1, L.P.
Lincoln Partnership #2, L.P.
Lincoln Partnership #3, L.P.
HFC Partnership, L.P.
Lincoln 88 Partnership, L.P.
Lincoln Partnership #11, L.P.
Two Thousand Eight Partnership, L.P.
Donlan Partnership #1, L.P.
HFC2 Partnership, L.P. Net Venture $2,295,308 (89%) 2,573,908 (100%) 2,574,495 (100%) 2,572,154 (100%) 4,005,510 (100%) 5,278,795 (100%) 5,239,295 (100%) 5,239,295 (100%) 5,189,295 (100%) Gopher

Fund -0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0- Gill

Industries, L.P. -0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0- Falcon

Fund -0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

Mar. 31, 1990 Lincoln Partnership #1, L.P.
Lincoln Partnership #2, L.P.
Lincoln Partnership #3, L.P.
HFC Partnership, L.P.
Lincoln 88 Partnership, L.P.
Lincoln Partnership #11, L.P.
Two Thousand Eight Partnership, L.P.
Donlan Partnership #1, L.P.
HFC2 Partnership, L.P. 2,344,260 (89%) 2,608,416 (100%) 2,519,273 (97%) 1,315,254 (52%) 4,306,465 (100%) 5,662,646 (100%) 5,661,210 (100%) 5,640,410 (100%) 2,843,922 (54%) -0-

-0-

-0-
$300,830 (12%) -0-

-0-

-0-

-0-

601,660 (11%) -0-

-0-

-0-
$768,644 (31%) -0-

-0-

-0-

-0-

1,537,288 (29%) -0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-- 55 -

Mar. 31, 1991

Lincoln Partnership #1, L.P.
Lincoln Partnership #2, L.P.
Lincoln Partnership #3, L.P.
HFC Partnership, L.P.
Lincoln 88 Partnership, L.P.
Lincoln Partnership #11, L.P.
Two Thousand Eight Partnership, L.P.
Donlan Partnership #1, L.P.
HFC2 Partnership, L.P. Net Venture $2,335,433 (89%) 160,650 (6%) 2,500,084 (100%) 1,073,125 (44%) 3,932,136 (91%) 5,663,261 (100%) 145,496 (3%) 5,304,234 (95%) 2,204,380 (42%) Gopher

Fund -0-

-0-

-0-
$547,863 (22%) -0-

-0-

-0-

-0-

1,095,727 (21%) Gill

Industries, L.P. -0-

-0-

-0-
$695,483 (28%) -0-

-0-

-0-

-0-

1,390,967 (26%) Falcon

Fund -0-
$2,251,000 (86%) -0-

-0-

-0-

-0-

5,465,000 (97%) -0-

-0-

Mar. 31, 1992 Lincoln Partnership #1, L.P.
Lincoln Partnership #2, L.P.
Lincoln Partnership #3, L.P.
HFC Partnership, L.P.
Lincoln 88 Partnership, L.P.
Lincoln Partnership #11, L.P.
Two Thousand Eight Partnership, L.P.
Donlan Partnership #1, L.P.
HFC2 Partnership, L.P. 1,301,765 (51%) 1,640,030 (63%) 1,305,818 (52%) 1,034,352 (42%) 3,837,320 (89%) 5,615,134 (100%) 1,859,255 (33%) 2,617,115 (47%) 1,659,426 (32%) 693,050

(27%) -0-

1,191,836 (48%) 566,257 (23%) -0-

-0-

-0-

2,572,652 (46%) 1,133,910 (22%) -0-

-0-

-0-

665,673 (27%) -0-

-0-

-0-

-0-

1,331,345 (25%) 301,518

(12%) 762,301 (29%) -0-

-0-

-0-

-0-

3,766,238 (67%) -0-

-0-- 56 -

Mar, 31, 1993

Lincoln Partnership #1, L.P.
Lincoln Partnership #2, L.P.
Lincoln Partnership #3, L.P.
HFC Partnership, L.P.
Lincoln 88 Partnership, L.P.
Lincoln Partnership #11, L.P.
Two Thousand Eight Partnership, L.P.
Donlan Partnership #1, L.P.
HFC2 Partnership, L.P. Net Venture $918,338 (36%) 1,582,013 (61%) 1,227,878 (50%) 1,071,313 (42%) 3,398,414 (88%) 5,608,393 (100%) 3,629,269 (65%) 2,457,021 (45%) 1,694,779 (32%) Gopher

Fund $689,373 (27%) -0-

1,218,243 (50%) 586,284 (23%) -0-

-0-

-0-

2,619,070 (48%) 1,163,864 (22%) Gill

Industries, L.P. -0-

-0-

-0-
$711,263 (28%) -0-

-0-

-0-

-0-

1,422,525 (27%) Falcon

Fund $646,302 (26%) 798,356 (31%) -0-

-0-

-0-

-0-

1,940,994 (35%) -0-

-0-