T.C. Memo. 1995-531

UNITED STATES TAX COURT

ANTHONY TEONG-CHAN GAW AS TRANSFEREE OF

RADCLIFFE INVESTMENT LTD., Petitioner v.

 COMMISSIONER OF INTERNAL REVENUE, Respondent

ANTHONY TEONG-CHAN GAW AS TRANSFEREE

OF BOT BUILDING CORPORATION, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 17906-92, 18268-92. Filed November 9, 1995.

John M. Youngquist, Lemoine Skinner III, and Donald L.

Feurzeig, for petitioner.

Mary E. Wynne and Thomas G. Schleier, for respondent.

Table of Contents

Page

FINDINGS OF FACT ...................... 7

I. General and Background ................. 7

A. Radcliffe ..................... 7

B. BOT ........................ 9

C. Certain Foreign Corporations That Pledged
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Cash Collateral in the Transactions at Issue ... 10

1. Pioneer Industries (Holdings) Ltd. and Its

Subsidiaries Multi-Credit Finance Co. Ltd.

and Mandalay Investments Ltd. ........ 10

2. Traveluck Investments, Inc. ......... 11

3. Double Wealth Co., Inc. ........... 12

4. Forward Investments, Ltd. .......... 12

D. Bangkok Bank Ltd. ................ 12

E. Union Bank and Certain of Its Affiliates ..... 14

F. Petitioner .................... 16

II. Transactions Involving Bangkok Bank Ltd. ........ 16

A. BB Loan No. 1 ................... 16

B. BB Loan No. 2 ................... 23

C. BB Loan No. 3 ................... 31

III. Transactions Involving Union Bank ........... 34

A. UB $570,000 Pre-March 1984 Loan

and UB $570,000 Renewed Loan . .......... 34

B. UB $325,000 Loan ................. 39

C. UB $800,000 Radcliffe Loan ............ 43

D. UB $1,300,000 Loan ................ 48

E. UB $1,830,000 Loan ................ 52

F. Facts Pertaining to All the Transactions

at Issue Involving Union Bank ........... 54

IV. Transaction Involving Horbury ............. 57

V. Income or Loss Reported by Radcliffe

and by BOT for the Years at Issue ........... 57

OPINION ........................... 58

I. Evidentiary Matters .................. 59

A. The Adverse Inference Rule--

Mme. Koo's Failure To Testify ........... 60

B. Evidentiary Objections .............. 71

1. Petitioner's Income Tax Returns ....... 71

2. Certain Instruments of Transfer

and Stock Certificates ............ 72

3. Horbury Financial Statement ......... 76

4. Annual Reports of Pioneer and

Financial Statements of Multi-Credit ..... 77

5. June 12, 1987 Newspaper Article ....... 78

6. August 28, 1987 Memorandum .......... 83

7. Paragraph 152 of the Stipulation of Facts . . 88

C. Respondent's Motion To Compel

Production of Documents .............. 88
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II. General Principles Applicable to These Cases ...... 93

A. Taxation of Interest Received by 

Foreign Corporations--In General ......... 94

B. Substance Over Form and Related Doctrines. ...... . 99 

III. Positions of the Parties With Respect

To the Transactions at Issue .............. 104

A. Bank Transactions ................. 104

1. Respondent's Position ............ 104

2. Petitioner's Position ............ 107

a. Petitioner's Principal Arguments .... 107

b. Petitioner's Alternative Arguments ... 110

B. Horbury Transaction ................ 110

1. Respondent's Position ............ 110

2. Petitioner's Position ............ 111

IV. Resolution of Certain Questions That Relate

to All or Some of the Transactions at Issue ...... 112

A. Resolution of Certain Questions That 

Relate to All the Transactions at Issue ...... 113

1. Relationships Among the Persons

Involved in the Transactions at Issue .... 113

a. Bank Transactions ............ 113

b. Horbury Transaction ........... 116

2. Purpose for the Form of Each

of the Transactions at Issue ......... 117

a. Whether the Form of Each

of the Transactions at Issue

Had a Nontax, Business Purpose ..... 117

(1) Bank Transactions ......... 118

(a) Bangkok Bank LA Branch

and Union Bank ........ 118

(b) Radcliffe and BOT ....... 123

(c) Foreign Corporations

Pledging Collateral ...... 128

(d) Summary ............ 131

(2) Horbury Transaction ........ 132

b. Whether the Interest Deductions

Claimed by Radcliffe and by BOT

Indicate a Tax Avoidance Purpose

for Any of the Transactions at Issue . . 133

(1) Bank Transactions ......... 133

(2) Horbury Transaction ........ 135

B. Resolution of Certain Questions That

Relate Only to the Bank Transactions ....... 136

1. Whether the Binding Commitment Test

of the Step Transaction Doctrine

Applies to Any of the Bank Transactions ... 136

2. Whether the Role of the Banks in

Question in the Bank Transactions
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May Be Ignored or Recharacterized

Even Though the Parties Agree on

Brief That Those Banks Were Engaged

in Commercial Banking and That They

Were Not Controlled By Radcliffe,

BOT, or the Foreign Corporations

Pledging Collateral ............. 137

V. Analysis of the Transactions at Issue ......... 139

A. Bank Transactions ................. 141

1. BB Loan No. 1 Transaction .......... 141

2. BB Loan No. 2 Transaction .......... 147

3. BB Loan No. 3 Transaction .......... 151

4. UB $570,000 Pre-March 1984 Loan and 

UB $570,000 Renewed Loan Transactions .... 154

5. UB $325,000 Loan Transaction ......... 159

6. UB $800,000 Radcliffe Loan Transaction .... 163

7. UB $1,300,000 Loan Transaction ........ 168

8. UB $1,830,000 Loan Transaction ........ 170

B. Horbury Transaction ................ 171

VI. Petitioner's Constitutional and

Abuse of Discretion Claims ............... 178

A. Petitioner's Constitutional Claim ......... 182

1. Petitioner's Claim That He Was Singled Out . . 183

2. Petitioner's Claim That He Was Singled Out 

Based on Constitutionally Impermissible

Grounds ................... 187

B. Petitioner's Abuse of Discretion Claims ...... 189

1. Petitioner's Claim That Rev. Rul. 87-89

Should Not Be Applied Retroactively ..... 189

2. Petitioner's Claim That Respondent

Did Not Comply With Her Duty to Enforce

the Federal Tax Law Consistently ....... 193

VII. Additions to Tax .................... 194

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: In a notice of transferee liability,

respondent determined that petitioner is liable as a transferee

of Radcliffe Investment Ltd. (Radcliffe) for the following

deficiencies in, additions to, and penalties on Radcliffe's

withholding tax:
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1 Unless otherwise indicated, all section references are to the

Internal Revenue Code (Code) in effect for the years at issue and

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

Procedure.

2 The words "loan", "lend", "interest", "fund", "funded", "secure", "security", "pledge", "payment", "lien", "guaranteed",

"collateral", and similar words are used herein to describe the

form of the transactions at issue and do not reflect acceptance

by the Court that the substance of the transactions follows the

form thereof.

 Additions to Tax or Penalties 

 Section Section Section Section Section Section

Year Deficiency 6651(a)1 6653(a)(1) 6653(a)(2) 6653(a)(1)(A) 6653(a)(1)(B) 6656(a)

1984 $65,466 $16,366 $3,273 * $ -- -- $6,547

1985 124,338 31,085 6,217 * -- -- 12,434

1986 186,183 46,546 -- -- 9,309 * 18,618

* 50 percent of the interest due on the portion of the underpayment attributable to

negligence. Respondent determined that the entire underpayment was attributable to

negligence.

In a separate notice of transferee liability, respondent

determined that petitioner is liable as a transferee of BOT

Building Corp. (BOT) for the following deficiencies in, additions

to, and penalties on BOT's withholding tax:

 Additions to Tax or Penalties 

 Section Section Section Section Section Section

Year Deficiency 6651(a) 6653(a)(1) 6653(a)(2) 6653(a)(1)(A) 6653(a)(1)(B) 6656(a)

1984 $95,751 $23,938 $4,788 * $ -- -- $9,575

1985 93,739 23,435 4,687 * -- -- 9,374

1986 35,778 8,945 -- -- 1,789 * 3,578

* 50 percent of the interest due on the portion of the underpayment attributable to

negligence. Respondent determined that the entire underpayment was attributable to

negligence.

The following issues remain for decision:

(1) Was the interest paid by Radcliffe and by BOT with

respect to the loan2 transactions at issue subject to withholding

tax under section 1442(a)? We hold that it was to the extent
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stated herein.

(2) Is petitioner liable as a transferee of Radcliffe and

of BOT for the withholding tax that we have sustained against

them? We hold that he is.

(3) Did respondent violate petitioner's right to equal

protection of the law under the Fifth Amendment to the Constitution by making the withholding tax determinations that we have

sustained against Radcliffe and BOT? We hold that she did not.

(4) Did respondent abuse her discretion by making the

withholding tax determinations that we have sustained against

Radcliffe and BOT? We hold that she did not.

(5) Are Radcliffe and BOT liable for the additions to tax

for failure to file timely required withholding tax returns? We

hold that they are to the extent stated herein.

(6) Are Radcliffe and BOT liable for the additions to tax

for negligence or disregard of rules or regulations? We hold

that they are to the extent stated herein.

(7) Are Radcliffe and BOT liable for the penalties for

failure to make timely deposits of required withholding tax? We

hold that they are to the extent stated herein.

(8) Is petitioner liable as a transferee of Radcliffe and

of BOT for the additions to tax and penalties that we have

sustained against them? We hold that he is.
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3 We found the record in these cases to have been poorly developed, inconclusive, and/or not reliable in many respects, including certain material respects. Although the gaps in the evidence

are substantial in many instances, and therefore our findings of

fact are incomplete in those respects, we have not undertaken to

note every instance in which the record does not contain reliable

evidence that would have enabled us to find all the facts relevant to our deciding the issues presented. Our task in the face

of such a record has been further complicated by the parties'

failure to reflect fully the facts that are reliably established

by the record and their attempt (particularly petitioner's

attempt) to support their respective positions herein by relying

on so-called facts that are alleged in their briefs but that are

not supported by credible evidence in the record. Statements in

briefs are not evidence, Rule 143(b), and we have attached no

weight to the parties' allegations on brief that are not supported by reliable evidence in the record.

4 Each party objected to certain stipulations of fact (stipulations) on grounds of relevancy and/or hearsay. We address those

objections below.

FINDINGS OF FACT3

Some of the facts have been stipulated and are so found

unless otherwise stated herein.4

At the time the petitions were filed, petitioner resided in

Hong Kong, British Crown Colony.

I. General and Background

A. Radcliffe

Radcliffe, which was incorporated in Liberia around 1979 and

conducted business in California during the years at issue, was

organized to invest in New Montgomery South Center (NMSC) in San

Francisco, California (San Francisco). As of January 1984,

Radcliffe held a 75-percent interest in NMSC. Radcliffe acquired

an additional 13-percent interest in NMSC for $1,300,000 in
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February 1985 and the remaining 12-percent interest for

$1,000,000 in March 1986. Radcliffe also owned an interest in

the Meridien Hotel in San Francisco. 

During relevant periods, NMSC was a California general

partnership that was formed to acquire commercial office buildings located at 55 Hawthorne Street and 631 Howard Street in San

Francisco. During at least a portion of the years at issue,

Lyman Jee (Mr. Jee) was a partner of Radcliffe in NMSC.

Petitioner's father, S.C. Gaw, wholly owned Radcliffe as of

the time of his death in October 1983. After S.C. Gaw's death,

pursuant to discussions and an agreement among petitioner, his

mother, and his siblings (family property division), it was

determined that petitioner was to receive the stock of Radcliffe

that his father had owned, and petitioner acquired all of the

stock of Radcliffe no later than July 1984. During relevant

periods, petitioner was chairman and president of Radcliffe, and

his wife, Rossana W. Gaw (Ms. Gaw) was its secretary and treasurer.

During the years at issue, the net worth of Radcliffe

(including all loan liabilities) was not less than $6,033,039. 

Radcliffe was liquidated on December 23, 1986, and all of

Radcliffe's corporate assets, which had a net value in excess of

liabilities of at least $1,000,000, were transferred to petitioner as its sole shareholder.
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B. BOT

BOT, which was incorporated in California in 1979 and

conducted business there during the years at issue, was

organizedto invest in 300 Montgomery Associates (300 Montgomery

Associates) in San Francisco. In 1979, BOT acquired an 80-

percent interest in 300 Montgomery Associates that it held during

the years at issue. During relevant periods, 300 Montgomery

Associates was a California general partnership that owned a

commercial office building located at 300 Montgomery Street in

San Francisco. Mr. Jee was BOT's partner in 300 Montgomery

Associates during the years at issue.

When BOT was incorporated and throughout the years at issue

until December 29, 1986, its sole shareholder was Pempire Investment Ltd. (Pempire), which was incorporated in Liberia on November 6, 1978. Prior to the time at which petitioner acquired all

the stock of Pempire, it was wholly owned by Merit Investment

Co., Inc. (Merit), which was also incorporated in Liberia. 

S.C. Gaw wholly owned the stock of Merit as of the time of

his death in October 1983. Pursuant to the family property

division with his mother and siblings, petitioner acquired all of

the stock of Pempire, and therefore acquired indirectly all of

the stock of BOT, no later than July 1984. At least during 1984,

petitioner was chairman and president of Pempire. During relevant periods, petitioner was chairman and president of BOT, and
- 10 -

at least during 1984, Ms. Gaw was vice chairman and secretary of

BOT.

During the years at issue, the net worth of BOT (including

all loan liabilities) was not less than $4,130,695. Pempire was

dissolved on December 29, 1986, and its assets, including its

stock in BOT, were distributed to petitioner. BOT was liquidated

on December 30, 1986, and all of BOT's corporate assets, which

had a net value in excess of liabilities of at least $1,000,000,

were transferred to petitioner as its sole shareholder.

C. Certain Foreign Corporations That Pledged

Cash Collateral in the Transactions at Issue

1. Pioneer Industries (Holdings) Ltd. and Its

Subsidiaries Multi-Credit Finance Co. Ltd.

and Mandalay Investments Ltd. 

Pioneer Industries (Holdings) Ltd. (Pioneer) was incorporated in Hong Kong, and its stock was publicly traded on the

Hong Kong stock exchange from 1970 until at least the time of the

trial of these cases.

The annual report of Pioneer for its fiscal year ended March

31, 1986, indicated that petitioner, his wife Ms. Gaw, and family

trusts of which they and their family were among the beneficiaries held an aggregate of 2,415,092 shares of Pioneer, or 19.2

percent of the 12,566,202 shares issued and outstanding at that

time. As of December 1985, an officer of Union Bank believed

that petitioner was a major shareholder of Pioneer. During at

least a portion of the years at issue, petitioner's mother and
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his mother-in-law Mme. Y.C. Koo (Mme. Koo) owned stock in

Pioneer.

Throughout the years at issue until at least the time of the

trial of these cases, petitioner was the managing director and

chairman of Pioneer. Petitioner became managing director of

Pioneer in 1973 at the behest of Mme. Koo. He became chairman of

that company after the death of his father in October 1983. Ms.

Gaw also was a director of Pioneer during the years at issue.

Prior to and during the years at issue, Pioneer wholly or

partially owned a number of corporations, including its two

wholly owned subsidiaries Multi-Credit Finance Co. Ltd. (MultiCredit), which was incorporated in Hong Kong, and Mandalay

Investments Ltd. (Mandalay). At least prior to the years at

issue, petitioner was president and secretary of Multi-Credit. 

Prior to those years and at least during 1985 and 1986, petitioner was managing director of Multi-Credit, and at least during

1986, Ms. Gaw was one of its directors. At least during 1984,

petitioner was president of Mandalay and Ms. Gaw was its executive director and secretary.

2. Traveluck Investments, Inc.

Traveluck Investments, Inc. (Traveluck) was incorporated in

Liberia, and, at all relevant periods after January 3, 1985, one

share of the stock of Traveluck was held in the name of Mme. Koo. 

At least during 1985, petitioner was a director of Traveluck.
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3. Double Wealth Co., Inc.

Double Wealth Co., Inc. (Double Wealth) was incorporated in

Liberia on January 7, 1985, and, at all relevant periods after

January 7, 1985, one share of the stock of Double Wealth was held

in the name of Mme. Koo. During the years at issue, petitioner,

Ms. Gaw, and Mme. Koo were the directors of Double Wealth. At

least during 1985, petitioner was Double Wealth's chairman and

president and Ms. Gaw was its secretary and treasurer.

4. Forward Investments, Ltd.

Forward Investments, Ltd. (Forward) was incorporated in

Liberia on December 3, 1980. During that month, one share of

stock of Forward was issued in the name of Mme. Koo. During the

years at issue, petitioner, Ms. Gaw, and Mme. Koo were the

directors of Forward. At least during 1984 and 1985, Ms. Gaw was

the secretary of Forward.

As of June 25, 1985, petitioner had given his personal

guarantee for $3,800,000 to Standard Chartered Bank, Hong Kong

(Standard Chartered Bank HK), an affiliate of Union Bank, as

security for credit made available to Forward by Standard Chartered Bank HK.

D. Bangkok Bank Ltd.

During the years at issue, Bangkok Bank Ltd., a Thai banking

corporation, was engaged in the banking business in California

and Hong Kong through unincorporated branches located in Los
- 13 -

5 Mandalay held .91 percent of the equity of Bangkok Bank Ltd.

as of Mar. 31, 1984, and .83 percent of that equity as of Mar.

31, 1985, and Mar. 31, 1986.

6 Petitioner notes on brief that Pioneer's subsidiaries included

a subsidiary in which Pioneer owned 60 percent of the equity. 

The record does not disclose whether or not that subsidiary owned

any stock in Bangkok Bank Ltd.

Angeles (Bangkok Bank LA branch or Los Angeles branch) and Hong

Kong (Bangkok Bank HK branch or Hong Kong branch), respectively. 

During those years, the interest income earned by Bangkok Bank LA

branch in its lending activity was effectively connected with the

conduct of its banking business in California.

Radcliffe began dealing with Bangkok Bank LA branch in May

1984. No later than the years at issue, certain of the foreign

corporations that pledged cash collateral in one or more of

thetransactions at issue in which the Los Angeles branch and/or

the Hong Kong branch of Bangkok Bank Ltd. was involved (viz.,

Intercontinental Enterprises Corp. of Liberia (Intercontinental),

Traveluck, and Double Wealth) maintained at least one account

with Bangkok Bank HK branch. Prior to and during the years at

issue, Pioneer and at least certain of its subsidiaries, including its wholly owned subsidiaries Multi-Credit and Mandalay, had

banking relationships with Bangkok Bank Ltd. Prior to and during

the years at issue, Pioneer and at least certain of its subsidiaries, including Mandalay,5 owned stock in Bangkok Bank Ltd.6

The annual reports of Pioneer for its fiscal years ended

March 31, 1983, and March 31, 1984, indicated that for each such

year (1) Pioneer held 1.6 percent and its subsidiaries held 1.6
- 14 -

percent of the equity of Bangkok Bank Ltd., or a total of 3.2

percent of that equity and (2) the cost of that total equity investment by Pioneer and its subsidiaries was in excess of 10 percent of Pioneer's net assets. The annual report of Pioneer for

its fiscal year ended March 31, 1986, indicated that (1) the effective percentage of the equity of Bangkok Bank Ltd. held (a) by

Pioneer and (b) by its subsidiaries and corporations in which it

owned 20 to 50 percent of the stock (associated corporations) was

1.44 percent and 3.02 percent, respectively, or a total of 4.46

percent and (2) the cost of that total equity investment (a) by

Pioneer and (b) by its subsidiaries and associated corporations

exceeded 10 percent of the net assets of those companies.

A record of Union Bank, dated July 10, 1984, indicated that

in 1984 petitioner was both a 10-percent shareholder of Bangkok

Bank Ltd. and a member of Bangkok Bank Ltd.'s Advisory Board.

Bangkok Bank Ltd. and its Los Angeles and Hong Kong branches

desired to accommodate, and were susceptible to influence by,

petitioner, Mme. Koo, Radcliffe, Pioneer and its wholly owned

subsidiaries Multi-Credit and Mandalay, Intercontinental,

Traveluck, and Double Wealth.

E. Union Bank and Certain of Its Affiliates

During the years at issue, Union Bank, a wholly owned U.S.

subsidiary of Standard Chartered Bank PLC, a London-based bank,
- 15 -

7 Although not altogether clear from the record, it appears that

prior to the years at issue Standard Chartered Bank PLC and/or a

predecessor had been known as the Chartered Bank.

was engaged in the banking business in California.7 During those

years, Standard Chartered Bank HK and Standard Chartered Bank,

Singapore, were affiliates of Union Bank that were engaged in the

banking business in Hong Kong and Singapore, respectively.

Petitioner, Radcliffe, and BOT began dealing with Union Bank

and/or its branches or predecessors in San Francisco in 1979. 

S.C. Gaw began dealing with Union Bank and/or its branches or

predecessors in San Francisco no later than 1979. Prior to the

years at issue, S.C. Gaw, and prior to and during those years,

petitioner were valued clients of Standard Chartered Bank HK. 

During relevant periods, Pioneer and at least certain of its

subsidiaries, including its wholly owned subsidiaries MultiCredit and Mandalay, were valued clients of Standard Chartered

Bank PLC and certain of its subsidiary banks including Standard

Chartered Bank HK. No later than the years at issue, certain of

the foreign corporations that pledged cash collateral in one or

more of the transactions at issue in which Union Bank and its

affiliates Standard Chartered Bank HK and/or Standard Chartered

Bank, Singapore, were involved (viz., Merit, Forward, and

Pempire) maintained at least one account with one or more of

those banks.

Union Bank and its affiliates Standard Chartered Bank HK and

Standard Chartered Bank, Singapore, desired to accommodate, and
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were susceptible to influence by, petitioner, Mme. Koo,

Radcliffe, BOT, Pioneer and its wholly owned subsidiaries MultiCredit and Mandalay, Merit, Forward, and Pempire.

F. Petitioner

Petitioner was a U.S. citizen during the years at issue. 

Prior to and during those years, petitioner and Mme. Koo had

close and amicable business and family relationships. Thus, for

example, petitioner was able to borrow from, and give guarantees

for more than he was worth to, banks in Hong Kong because those

banks knew that Mme. Koo would honor his obligations if the need

arose.

At the time of the transactions at issue, petitioner was

familiar with the U.S. withholding tax requirements applicable to

interest from a U.S source that was paid to foreign corporations.

II. Transactions Involving Bangkok Bank Ltd.

A. BB Loan No. 1

By letter dated May 16, 1984 (May 16, 1984 letter), petitioner requested on behalf of Radcliffe that the Hong Kong branch

of Bangkok Bank Ltd. arrange for the Los Angeles branch of that

bank to fund a loan of $1,000,000 to Radcliffe. Bangkok Bank HK

branch complied with that request, and Bangkok Bank LA branch

funded a $1,000,000 loan to Radcliffe on or about May 17, 1984

(original BB Loan No. 1). That loan was due on May 17, 1985. 

The proceeds of the original BB Loan No. 1 were used to reimburse

Bangkok Bank HK branch for settling a claim by Hong Kong and
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8 The continuing, unlimited, unconditional promise and the

general security agreement applied to all other loans and extensions of credit by Bangkok Bank LA branch to Radcliffe.

Shanghai Banking Corp. of San Francisco against Radcliffe under a

standby letter of credit issued by that branch with respect to

Radcliffe. That reimbursement was effected by having the loan

proceeds credited to an account of Bangkok Bank HK branch that

was maintained with Bangkok Bank LA branch.

To document the original BB Loan No. 1, petitioner signed on

behalf of Radcliffe (1) a promissory note that was made payable

to Bangkok Bank LA branch and that was in the same amount as that

loan, (2) a continuing, unlimited, unconditional promise (continuing, unlimited, unconditional promise) by Radcliffe to Bangkok

Bank LA branch that stated that Radcliffe agreed to perform its

obligations under that loan, and (3) an agreement (general security agreement) that stated that Bangkok Bank LA branch had a security interest in all of Radcliffe's personal property and in

all of its real property pledged to or in the possession of that

branch.8

Petitioner also requested on behalf of Radcliffe in the May

16, 1984 letter that Bangkok Bank HK branch issue to Bangkok Bank

LA branch a standby letter of credit for $1,000,000 with respect

to Radcliffe. Bangkok Bank HK branch complied with that request

by issuing on May 17, 1984, the date on or about which the

original BB Loan No. 1 was funded, a $1,000,000 standby letter of

credit with respect to Radcliffe ($1,000,000 standby letter of
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9 The parties stipulated that the $1,000,000 standby letter of

credit was issued with respect to petitioner. However, the

records of the Los Angeles and Hong Kong branches of Bangkok Bank

Ltd. unequivocally indicate that the $1,000,000 standby letter of

credit was issued with respect to Radcliffe. Although we do not

lightly disregard facts stipulated by the parties, we will do so

"where justice requires it if the evidence contrary to the

stipulation is substantial or the stipulation is clearly contrary

to facts disclosed by the record." Cal-Maine Foods, Inc. v.

Commissioner, 93 T.C. 181, 195 (1989). We find the parties'

stipulation that the $1,000,000 standby letter of credit was

issued with respect to petitioner to be clearly contrary to the

facts disclosed in the record. Therefore, we will not accept

that stipulation.

credit).9 That letter of credit guaranteed the original BB Loan

No. 1, was in the same amount as that loan, and expired on May

17, 1985, the same date on which the original BB Loan No. 1 was

due.

Radcliffe promised in the May 16, 1984 letter to indemnify

Bangkok Bank HK branch for any losses whatsoever that it might

incur with respect to the $1,000,000 standby letter of credit. 

In addition to signing the May 16, 1984 letter on behalf of

Radcliffe, petitioner signed it in his individual capacity,

stating that he "join[ed] in the above guarantee" to Bangkok Bank

HK branch reflected in that letter.

A deposit of $450,000 in the name of Intercontinental

(Intercontinental $450,000 deposit) in Bangkok Bank HK branch was

pledged as security for the $1,000,000 standby letter of credit.

The interest rate on the original BB Loan No. 1 was initially set at 1.5 percent above Bangkok Bank LA branch's prime rate,

but was subsequently reduced, effective November 1, 1984, to .75
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10 The June 4, 1985 interest payment also included interest paid

on the first renewal of the original BB Loan No. 1.

percent above that bank's prime rate. The interest on that loan

was payable by Radcliffe on the last day of each month.

The following actual interest rate percentages were applicable to the original BB Loan No. 1 for the following periods:

 Actual Interest

 Period Rate Percentage

May 17, 1984, until June 25, 1984 14.00

June 25, 1984, until Oct. 1, 1984 14.50

Oct. 1, 1984, until Oct. 19, 1984 14.25

Oct. 19, 1984, until Nov. 1, 1984 14.00

Nov. 1, 1984, until Nov. 9, 1984 12.75

Nov. 9, 1984, until Dec. 1, 1984 12.50

Dec. 1, 1984, until Jan. 2, 1985 12.25

Jan. 2, 1985, until May 17, 1985 11.50

Interest on the original BB Loan No. 1 was paid on the following

dates:

June 6, 1984

July 5, 1984

Aug. 6, 1984

Aug. 29, 1984

Oct. 4, 1984

Oct. 31, 1984

Dec. 10, 1984

Jan. 14, 1985

Feb. 5, 1985

Mar. 4, 1985

Apr. 8, 1985

May 6, 1985

June 4, 198510

Bangkok Bank LA branch renewed the original BB Loan No. 1

(BB Loan No. 1 first renewal) when it became due on May 17, 1985,

and that renewed loan was due on May 16, 1986. To document that

loan renewal, petitioner signed on behalf of Radcliffe a promis-
- 20 -

sory note that was made payable to Bangkok Bank LA branch and

that was in the same amount as that loan. The interest rate on

the BB Loan No. 1 first renewal was set at .75 percent above

Bangkok Bank LA branch's prime rate. The interest on that renewed loan was payable by Radcliffe on the first day of each

month.

By telex dated May 16, 1985, Bangkok Bank HK branch amended

its $1,000,000 standby letter of credit in order to renew it to

May 17, 1986, one day after the due date of the BB Loan No. 1

first renewal.

The following actual interest rate percentages were applicable to the BB Loan No. 1 first renewal for the following periods:

 Actual Interest

 Period Rate Percentage

May 17, 1985, until July 1, 1985 10.75

July 1, 1985, until Apr. 1, 1986 10.25

Apr. 1, 1986, until Apr. 28, 1986 9.75

Apr. 28, 1986, until May 17, 1986 9.25

Interest on the BB Loan No. 1 first renewal was paid on the

following dates:

June 4, 1985

July 10, 1985

Aug. 4, 1985

Sept. 3, 1985

Oct. 4, 1985

Nov. 5, 1985

Dec. 10, 1985

Jan. 6, 1986

Feb. 10, 1986
- 21 -

11 The June 16, 1986 interest payment also included interest

paid for the period following the due date of the BB Loan No. 1

first renewal.

12 Petitioner admits on brief, and respondent does not dispute,

that on June 30, 1986, the Intercontinental $450,000 deposit was

applied to reduce the $600,000 outstanding balance of that loan

(continued...)

Mar. 10, 1986

Apr. 4, 1986

May 7, 1986

June 16, 198611

On May 16, 1986, Radcliffe reduced the principal amount of

the BB Loan No. 1 first renewal to $600,000 by paying $400,000 to

Bangkok Bank LA branch. By letter dated May 15, 1986, petitioner

requested on behalf of Radcliffe that Bangkok Bank HK branch

reduce its $1,000,000 standby letter of credit to $600,000 and

renew it for another year. Bangkok Bank HK branch complied with

that request by amending the $1,000,000 standby letter of credit

to reduce it to $600,000 and renewing the amended $600,000 letter

of credit to May 17, 1987.

On June 30, 1986, pursuant to instructions from Intercontinental, the Hong Kong branch of Bangkok Bank Ltd. telexed the

following instructions to the Los Angeles branch of that bank: 

The Los Angeles branch was to debit the account it maintained for

the Hong Kong branch by $450,000, and that money was to be

applied in partial repayment of the then outstanding $600,000

loan balance. On June 30, 1986, that balance was reduced to

$150,000 by the payment of $450,000.12
- 22 -

12(...continued)

to $150,000. We accept the parties' agreement on this point for

purposes of our Opinion, even though the record does not establish whether (1) Bangkok Bank HK branch applied $450,000 of its

then outstanding standby letter of credit to reduce the then outstanding $600,000 loan balance to $150,000 and immediately thereafter reimbursed itself with the Intercontinental $450,000 deposit or (2) the Intercontinental $450,000 deposit was directly

applied to reduce the then outstanding balance of that loan to

$150,000.

13 The record does not disclose the terms of any renewal after

the BB Loan No. 1 first renewal became due on May 16, 1986, and

before it was renewed in a reduced principal amount on or about

July 1, 1986. 

On or about July 1, 1986, Bangkok Bank LA branch renewed its

outstanding $150,000 loan to Radcliffe and that renewed loan was

due on June 30, 1987.13 By letter dated June 26, 1986, petitioner requested on behalf of Radcliffe that Bangkok Bank HK

branch reduce its then outstanding standby letter of credit to

$150,000 and renew it to June 30, 1987. Bangkok Bank HK branch

complied with that request by amending its standby letter of

credit to reduce it to $150,000 and renewing the amended $150,000

letter of credit to June 30, 1987.

On January 14, 1987, the outstanding $150,000 loan balance

was repaid. On or about March 3, 1987, Bangkok Bank HK branch

canceled its outstanding $150,000 standby letter of credit with

respect to that loan.

For the period that commenced on May 16, 1986, the date on

which the BB Loan No. 1 first renewal was due, until January 14,

1987, the date on which the then outstanding $150,000 loan

balance was repaid, interest on the then outstanding balance of
- 23 -

that loan was set at a rate that was .75 percent above Bangkok

Bank LA branch's prime rate and interest was payable on the first

day of each month.

During the period May 16, 1986, until January 14, 1987, the

following actual interest rate percentages were applicable to the

Bangkok Bank Los Angeles branch loan to Radcliffe for the following periods:

 Actual Interest

 Period Rate Percentage

May 16, 1986, until Sept. 10, 1986 9.25

Sept. 10, 1986, until Jan. 14, 1987 8.25

Interest on that loan was paid on the following dates:

June 16, 1986

July 9, 1986

Aug. 8, 1986

Sept. 12, 1986

Oct. 14, 1986

Nov. 17, 1986

Dec. 5, 1986

Jan. 12, 1987

Jan. 14, 1987

(Hereinafter, the original BB Loan No. 1 and the renewals of that

loan will be referred to collectively as BB Loan No. 1.)

B. BB Loan No. 2

By letter dated May 23, 1985, petitioner requested on behalf

of Radcliffe that the Hong Kong branch of Bangkok Bank Ltd.

arrange for the Los Angeles branch of that bank to fund a loan of

$1,625,000 to Radcliffe (BB $1,625,000 Loan No. 2). Bangkok Bank

HK branch complied with that request, and Bangkok Bank LA branch

funded a $1,625,000 loan to Radcliffe on June 11, 1985. That

loan was due on June 11, 1986. The proceeds of BB $1,625,000
- 24 -

14 A financial statement of Radcliffe, dated Mar. 31, 1985, and

signed by petitioner, indicated that a $1,625,000 loan was

outstanding from Intercontinental to Radcliffe and that that loan

was to be replaced with a loan from Bangkok Bank LA branch.

15 The deposit in the name of Traveluck that was used to purchase the Traveluck $1,625,000 CD was made in Bangkok Bank LA

branch on June 11, 1985, the same date on which BB $1,625,000

Loan No. 2 was funded.

Loan No. 2 were credited to the account of Bangkok Bank HK branch

with Bangkok Bank LA branch.14

To document BB $1,625,000 Loan No. 2, petitioner signed on

behalf of Radcliffe a promissory note that was made payable to

Bangkok Bank LA branch and that was in the same amount as that

loan. The continuing, unlimited, unconditional promise and the

general security agreement signed by petitioner on behalf of

Radcliffe as part of the BB Loan No. 1 transaction applied to BB

$1,625,000 Loan No. 2, as well as to the increase in that loan

and the renewal of that increased loan.

BB $1,625,000 Loan No. 2 was secured by a $1,625,000 certificate of deposit issued by Bangkok Bank LA branch in the name

of Traveluck (Traveluck $1,625,000 CD). That certificate of

deposit was issued on June 11, 1985,15 the same date on which BB

$1,625,000 Loan No. 2 was funded, and was to mature on June 11,

1986, the same date on which BB $1,625,000 Loan No. 2 was due. 

Throughout the period June 11, 1985, until July 11, 1985, Bangkok

Bank LA branch blocked the deposit represented by the Traveluck

$1,625,000 CD so that it could not be withdrawn by Traveluck.

The interest rate on BB $1,625,000 Loan No. 2 was set at .5
- 25 -

percent above the interest rate on the Traveluck $1,625,000 CD. 

The interest rate on BB $1,625,000 Loan No. 2 was 8.25 percent,

and the interest rate on the Traveluck $1,625,000 CD was 7.75

percent. At the special request of Radcliffe, the interest on BB

$1,625,000 Loan No. 2 was made payable on a monthly basis on the

11th of each month, and, at the special request of Traveluck, the

interest on the Traveluck $1,625,000 CD was made payable on a

monthly basis on the 11th of each month.

On July 10, 1985, Bangkok Bank HK branch forwarded to

Bangkok Bank LA branch instructions from Traveluck (July 10, 1985

instructions) that the deposit in Bangkok Bank LA branch that was

represented by the Traveluck $1,625,000 CD was to be transferred

to an account in the name of Double Wealth. The July 10, 1985

instructions from Traveluck also directed Bangkok Bank LA branch

to remit the interest payable on the Traveluck $1,625,000 CD for

the one-month period June 11, 1985, until July 11, 1985, to

Traveluck's account with Bangkok Bank HK branch.

Pursuant to the July 10, 1985 instructions, on or about July

11, 1985, (1) the deposit in Bangkok Bank LA branch that was

represented by the Traveluck $1,625,000 CD was transferred from

the account in the name of Traveluck to an account in the name of

Double Wealth; (2) Bangkok Bank LA branch issued to Double Wealth

a certificate of deposit (Double Wealth $1,625,000 CD) that was

in the same amount for which the Traveluck $1,625,000 CD had been

issued and that matured on August 12, 1985; and (3) pursuant to a
- 26 -

16 The decision of Double Wealth's board of directors was documented by minutes of a meeting of that board signed by Mme. Koo

as chairman of that meeting. The pledge of the $1,625,000

certificate of deposit in the name of Double Wealth was documented by a pledge executed by Ms. Gaw and witnessed by Mme. Koo.

decision of the board of directors of Double Wealth (viz.,

petitioner, Ms. Gaw, and Mme. Koo), the $1,625,000 certificate of

deposit in the name of Double Wealth and the renewals of that

certificate of deposit were pledged as security for BB $1,625,000

Loan No. 2 and the renewal of that loan.16

When the Double Wealth $1,625,000 CD matured on August 12,

1985, Bangkok Bank LA branch issued a second certificate of

deposit to Double Wealth in the amount of $1,625,000 that matured

on September 12, 1985. From July 11, 1985, until that second

certificate of deposit matured, the interest rate on BB

$1,625,000 Loan No. 2 was set at 7.5 percent, which was .5

percent above the 7 percent interest rate on both of the

$1,625,000 certificates of deposit issued to Double Wealth.

When the second $1,625,000 certificate of deposit issued to

Double Wealth matured on September 12, 1985, Bangkok Bank LA

branch issued a third certificate of deposit to Double Wealth in

the amount of $1,625,000 that matured on June 11, 1986, the same

date on which BB $1,625,000 Loan No. 2 was due. During the

period September 12, 1985, until June 11, 1986, the interest rate

on that third certificate of deposit was set at .5 percent below
- 27 -

17 By telex dated Aug. 17, 1985, Bangkok Bank HK branch informed

Bangkok Bank LA branch that Radcliffe preferred that the interest

rate on BB $1,625,000 Loan No. 2 be set at 8.25 percent until

that loan became due on June 11, 1986. That telex further stated

that "we [Bangkok Bank HK branch] understand * * * [setting the

interest rate on BB $1,625,000 Loan No. 2 at 8.25 percent] means

the deposit interest rate will also be fixed at 7.75 * * *

[percent] until 11 Jun 86". Bangkok Bank LA branch acceded to

Radcliffe's wishes.

the interest rate on BB $1,625,000 Loan No. 2.17 During that

period, the interest rate on BB $1,625,000 Loan No. 2 was 8.25

percent and the interest rate on the third Double Wealth certificate of deposit was 7.75 percent. Interest on that loan was paid

on the following dates:

July 15, 1985

Aug. 12, 1985

Sept. 12, 1985

Oct. 15, 1985

Nov. 14, 1985

Dec. 12, 1985

Jan. 14, 1986

Feb. 13, 1986

Mar. 11, 1986

Apr. 14, 1986

May 12, 1986

Throughout the period July 11, 1985, until June 11, 1986,

during which the three certificates of deposit in the name of

Double Wealth served as security for BB $1,625,000 Loan No. 2,

Bangkok Bank LA branch blocked the deposit represented thereby so

that it could not be withdrawn by Double Wealth.

Pursuant to instructions of petitioner and Ms. Gaw on behalf

of Double Wealth, Bangkok Bank LA branch credited monthly to

Double Wealth's account with Bangkok Bank HK branch the interest

payable for the period August 1985 through May 1986 on the cer-
- 28 -

18 The $400,000 deposit in the name of Double Wealth that was

used to purchase the Double Wealth $400,000 CD was made in

Bangkok Bank LA branch on Apr. 14, 1986.

tificates of deposit in the name of Double Wealth. Interest on

the certificates of deposit in the name of Double Wealth was paid

on the following dates:

Aug. 12, 1985

Sept. 12, 1985

Oct. 15, 1985

Nov. 13, 1985

Dec. 11, 1985

Jan. 13, 1986

Feb. 11, 1986

Mar. 11, 1986

Apr. 11, 1986

May 13, 1986

On April 16, 1986, BB $1,625,000 Loan No. 2 was increased by

$400,000 to $2,025,000 (BB $2,025,000 Loan No. 2). The increase

in the loan amount was secured by a $400,000 certificate of deposit (Double Wealth $400,000 CD) in Bangkok Bank LA branch in

the name of Double Wealth.18 The Double Wealth $400,000 CD

matured on June 11, 1986, the same date on which BB $2,025,000

Loan No. 2 was due and the same date on which the third

$1,625,000 certificate of deposit in the name of Double Wealth

that also served as security for that loan matured. From the

time the Double Wealth $400,000 CD was issued on April 16, 1986,

until it matured on June 11, 1986, Bangkok Bank LA branch blocked

the deposit represented thereby so that it could not be withdrawn

by Double Wealth.
- 29 -

The $400,000 increase in the loan amount bore interest at a

rate that was set at .5 percent above the interest rate on the

Double Wealth $400,000 CD. The interest rate on the increase in

the loan amount was 8.25 percent, and the interest rate on the

Double Wealth $400,000 CD was 7.75 percent. Interest on BB

$2,025,000 Loan No. 2 was paid on May 12, 1986, and June 16,

1986.

On May 13, 1986, Bangkok Bank LA branch credited to Double

Wealth's account with Bangkok Bank HK branch the interest payable

on the Double Wealth $400,000 CD. On May 26, 1986, and on June

9, 1986, Ms. Gaw and petitioner, respectively, sent instructions

to Bangkok Bank LA branch on behalf of Double Wealth (May 26,

1986 and June 9, 1986 instructions) to remit on a monthly basis

the interest payable on the Double Wealth $1,625,000 and $400,000

certificates of deposit through Standard Chartered Bank, New

York, to the account of Vidda Investment Ltd. (Vidda) that was

maintained in Standard Chartered Bank HK. On June 11, 1986,

Bangkok Bank LA branch followed those instructions and remitted

to that account of Vidda the June 1986 interest payable on those

certificates of deposit.

When BB $2,025,000 Loan No. 2 became due on June 11, 1986,

it was renewed, and the renewed loan was due on September 12,

1986. When the Double Wealth $1,625,000 and $400,000 certificates of deposit matured on June 11, 1986, they were combined
- 30 -

into one certificate of deposit in the amount of $2,025,000

(Double Wealth $2,025,000 CD) that was issued in the name of

Double Wealth and that matured on September 12, 1986, the same

date on which BB $2,025,000 Loan No. 2 as renewed was due. 

During the period June 11, 1986, until September 12, 1986,

the interest rate on BB $2,025,000 Loan No. 2 was set at .5

percent above the interest rate on the Double Wealth $2,025,000

CD. The interest rate on BB $2,025,000 Loan No. 2 as renewed was

7 percent, and the interest rate on the Double Wealth $2,025,000

CD was 6.5 percent. Interest on that loan was paid on July 14,

1986, August 15, 1986, and September 12, 1986.

From the time the Double Wealth $2,025,000 CD was issued on

June 11, 1986, until September 12, 1986, when its proceeds were

used to repay BB $2,025,000 Loan No. 2 as renewed, Bangkok Bank

LA branch blocked the deposit represented thereby so that it

could not be withdrawn by Double Wealth. Pursuant to the May 26,

1986 and June 9, 1986 instructions, on July 14, 1986, and August

12, 1986, Bangkok Bank LA branch remitted the interest payable on

the Double Wealth $2,025,000 CD to the account of Vidda in

Standard Chartered Bank HK.

Pursuant to the instructions of Ms. Gaw, on September 12,

1986, BB $2,025,000 Loan No. 2 as renewed was repaid with the

proceeds represented by the Double Wealth $2,025,000 CD. Ms. Gaw

directed that the interest payable on that certificate of deposit
- 31 -

as of September 12, 1986, be transferred to Bangkok Bank HK

branch for the account of Double Wealth. Interest on that certificate of deposit was paid on September 12, 1986. (Hereinafter, BB $1,625,000 Loan No. 2, the $400,000 increase in that

loan, and BB $2,025,000 Loan No. 2 as renewed will be referred to

collectively as BB Loan No. 2.)

C. BB Loan No. 3

Petitioner requested on behalf of Radcliffe that the Hong

Kong branch of Bangkok Bank Ltd. arrange for the Los Angeles

branch of that bank to fund a loan of $1,000,000 to Radcliffe (BB

Loan No. 3). Bangkok Bank HK branch complied with that request,

and Bangkok Bank LA branch funded a $1,000,000 loan to Radcliffe

on November 12, 1985. That loan was due on November 12, 1986.

The proceeds of BB Loan No. 3 were credited to the account of

Bangkok Bank HK branch with Bangkok Bank LA branch.

To document that loan, petitioner signed on behalf of

Radcliffe a promissory note that was made payable to Bangkok Bank

LA branch and that was in the same amount as that loan. The

continuing, unlimited, unconditional promise and the general

security agreement signed by petitioner on behalf of Radcliffe as

part of the BB Loan No. 1 transaction applied to BB Loan No. 3.

Pursuant to a decision on October 28, 1985, of the board of

directors of Double Wealth (viz., petitioner, Ms. Gaw, and Mme.

Koo), a $1,000,000 certificate of deposit issued by Bangkok Bank
- 32 -

19 The decision of Double Wealth's board of directors was documented by minutes of a meeting of that board signed by Mme. Koo

as chairman of that meeting. Mme. Koo and Ms. Gaw signed on

behalf of Double Wealth an application, dated Nov. 12, 1985, for

a time deposit in the amount of $1,000,000. In addition, Mme.

Koo signed on behalf of Double Wealth a Form W-8, Certificate of

Foreign Status, dated Nov. 12, 1985, that was furnished to

Bangkok Bank LA branch in connection with the Double Wealth

$1,000,000 CD.

20 The deposit in the name of Double Wealth that was used to

purchase the Double Wealth $1,000,000 CD was made in Bangkok Bank

LA branch on or about Nov. 12, 1985, the date on which BB Loan

No. 3 was funded.

LA branch in the name of Double Wealth (Double Wealth $1,000,000

CD) was pledged as security for BB Loan No. 3.19 That certificate of deposit was issued on November 12, 1985, the same date on

which BB Loan No. 3 was funded, and matured on November 12, 1986,

the same date on which BB Loan No. 3 was due.20 From the time

the Double Wealth $1,000,000 CD was issued on November 12, 1985,

until its proceeds were used on September 12, 1986, to repay BB

Loan No. 3, Bangkok Bank LA branch blocked the deposit represented thereby so that it could not be withdrawn by Double Wealth.

The interest rate on BB Loan No. 3 was set at .5 percent

above the interest rate on the Double Wealth $1,000,000 CD. The

interest rate on BB Loan No. 3 was 8.25 percent, and the interest

rate on that certificate of deposit was 7.75 percent. The interest on BB Loan No. 3 was made payable on a monthly basis on the

12th of each month, and the interest on the Double Wealth

$1,000,000 CD was made payable on a monthly basis on the 11th of
- 33 -

each month. Interest on that loan was paid on the following

dates:

Dec. 13, 1985

Jan. 14, 1986

Feb. 13, 1986

Mar. 10, 1986

Apr. 14, 1986

May 12, 1986

June 16, 1986

July 14, 1986

Aug. 15, 1986

Sept. 12, 1986

Pursuant to the instructions of petitioner on behalf of

Double Wealth, Bangkok Bank LA branch credited monthly to Double

Wealth's account with that branch the interest payable on the

Double Wealth $1,000,000 CD for the period December 1985 through

May 1986. Interest on that certificate of deposit was paid on

the following dates:

Dec. 11, 1985

Jan. 13, 1986

Feb. 11, 1986

Mar. 11, 1986

Apr. 11, 1986

May 13, 1986

In the May 26, 1986 and June 9, 1986 instructions, Ms. Gaw

and petitioner, respectively, instructed Bangkok Bank LA branch

on behalf of Double Wealth to remit on a monthly basis the

interest payable on the Double Wealth $1,000,000 CD through

Standard Chartered Bank, New York, to the account of Vidda that

was maintained in Standard Chartered Bank HK. Pursuant to those

instructions, on June 11, 1986, July 14, 1986, and August 12,

1986, Bangkok Bank LA branch remitted the interest payable on
- 34 -

21 Although the parties do not make it altogether clear that the

interest paid by BOT to Union Bank during 1984 with respect to

the UB $570,000 pre-March 1984 loan while it was secured by the

Merit $570,000 deposit is at issue in these cases, it appears,

and we assume, that that interest was included in respondent's

determinations. The parties make general and sweeping contentions with respect to the transactions at issue involving Union

Bank and the foreign corporations that pledged cash collateral in

those transactions, and we construe their contentions to include

the UB $570,000 pre-March 1984 loan and Merit, unless they refer

to a specific transaction or foreign corporation other than

(continued...)

that certificate of deposit to that account.

Pursuant to the instructions of Ms. Gaw, BB Loan No. 3 was

repaid on September 12, 1986, with the proceeds represented by

the Double Wealth $1,000,000 CD. Ms. Gaw directed that the

interest payable on that certificate of deposit as of September

12, 1986, be transferred to Bangkok Bank HK branch for the

account of Double Wealth. Interest on that certificate of

deposit was paid on September 12, 1986.

III. Transactions Involving Union Bank

A. UB $570,000 Pre-March 1984 Loan

and UB $570,000 Renewed Loan 

In or about February 1979, Union Bank funded a loan of

$570,000 to BOT (UB $570,000 pre-March 1984 loan). The UB

$570,000 pre-March 1984 loan was periodically renewed and was

still outstanding in March 1984. From the time it was funded in

1979 until March 1984, the UB $570,000 pre-March 1984 loan was

secured by $570,000 of a Eurodollar deposit in the name of Merit

(Merit $570,000 deposit) in Standard Chartered Bank HK.21
- 35 -

21(...continued)

Merit.

22 The March 1984 interest payment with respect to the Union

Bank $570,000 loan to BOT does not appear to be broken down

between (1) the interest that was paid on that loan for the

portion of that month during which it was secured by the Merit

$570,000 deposit and (2) the interest that was paid on it for the

portion of that month during which it was secured by the $570,000

deposit in the name of Forward.

23 The parties stipulated that the UB $570,000 pre-March 1984

loan was renewed in March 1984. However, the record contains no

Union Bank documents that indicate that a renewal of that loan

(continued...)

Throughout the period in 1984 during which the UB $570,000

pre-March loan was outstanding, it bore interest at Union Bank's

London interbank offered rate (LIBOR) plus 1.5 percent or its

prime rate plus 1 percent. During 1984, the interest on the UB

$570,000 pre-March 1984 loan was payable (1) at the maturity of

any period during which a LIBOR-based interest rate was in effect

for no more than 180 days or (2) monthly for any period during

which a prime rate-based interest rate was in effect. Interest

on the UB $570,000 pre-March 1984 loan was paid in January,

February, and March 1984.22

In March 1984, the UB $570,000 pre-March 1984 loan was

renewed by Union Bank (original UB $570,000 renewed loan), and a

$570,000 Asian dollar deposit in the name of Forward (Forward

$570,000 deposit) was made in Standard Chartered Bank, Singapore,

was substituted for the Merit $570,000 deposit, and was pledged

as security for that loan.23 Interest on that loan was paid
- 36 -

23(...continued)

occurred in that month. The documents in the record indicate

that the UB $570,000 pre-March 1984 loan was renewed in July or

August 1983 and that it was due on July 15, 1984. The next

renewal of the Union Bank $570,000 loan to BOT concerning which

documents are in the record occurred in July or August 1984. It

is possible that a renewal of the UB $570,000 pre-March 1984 loan

could have occurred in connection with the replacement of the

Merit $570,000 deposit as its security that occurred in March

1984. Accordingly, we do not find the parties' stipulation that

the UB $570,000 pre-March 1984 loan was renewed in March 1984 to

be clearly contrary to the facts disclosed in the record. Consequently, we will accept that stipulation under the test of CalMaine Foods, Inc. v. Commissioner, 93 T.C. at 195-196.

24 The pledge of the Forward $570,000 deposit was documented by

a security agreement signed by Mme. Koo on behalf of Forward.

monthly to Union Bank.

Pursuant to a decision on March 15, 1984, of the board of

directors of Forward (viz., petitioner, Ms. Gaw, and Mme. Koo),

the Forward $570,000 deposit was pledged as security for the

$570,000 loan to BOT that Union Bank had funded.24 Throughout

the period March 1984 until July 10, 1986, during which the

Forward $570,000 deposit served as security for that loan and the

renewals thereof, Union Bank maintained a lien on that deposit.

Union Bank renewed the original UB $570,000 renewed loan on

four additional occasions for periods that ended on the following

dates: July 15, 1985 (UB $570,000 renewed loan first renewal),

October 10, 1985 (UB $570,000 renewed loan second renewal), April

10, 1986 (UB $570,000 renewed loan third renewal), and July 10,

1986 (UB $570,000 renewed loan final renewal). To document each

of the first three additional renewals, petitioner signed on
- 37 -

25 The record does not make clear the difference, if any, between Union Bank's prime rate and its reference rate. Certain

Union Bank documents suggest that Union Bank personnel may have

used the terms interchangeably.

behalf of BOT a promissory note that was made payable to Union

Bank and that was in the same amount as that loan.

The interest rate on the UB $570,000 renewed loan first

renewal was set at Union Bank's LIBOR plus 1.5 percent or its

prime rate plus 1 percent. The interest rate on the UB $570,000

renewed loan second and third renewals was set at Union Bank's

LIBOR plus 1.5 percent or its reference rate25 plus 1 percent.

The interest rate on the UB $570,000 renewed loan final renewal

was set at Union Bank's reference rate plus 1 percent.

The first three renewals of the UB $570,000 renewed loan

were to bear interest at Union Bank's LIBOR plus 1.5 percent if,

in general, BOT informed Union Bank that it wished to pay interest at that rate and specified the period for which that rate was

to be in effect. That period could have been between one and six

months for the UB $570,000 renewed loan first and third renewals

and one and three months for the UB $570,000 renewed loan second

renewal. If BOT did not so advise Union Bank, the UB $570,000

renewed loan was to bear interest at (1) the prime rate plus 1

percent in the case of the UB $570,000 renewed loan first renewal

and (2) the reference rate plus 1 percent in the case of the UB

$570,000 renewed loan second and third renewals.
- 38 -

The promissory note petitioner signed on behalf of BOT to

document the UB $570,000 renewed loan first renewal provided that

the interest rate on that loan was not to be less than 1 percent

more than the annualized effective interest rate on the bank

deposit pledged to secure that loan. That note also provided

that the interest on that loan was payable by BOT semiannually if

the UB $570,000 renewed loan first renewal bore interest at Union

Bank's LIBOR plus 1.5 percent and monthly if that loan bore

interest at the prime rate plus 1 percent. The promissory note

documenting the UB $570,000 renewed loan second renewal provided

that the interest on that loan was payable by BOT on the first of

each month. The promissory note documenting the UB $570,000

renewed loan third renewal provided that the interest on that

renewal was payable by BOT on the 10th of each month. The

interest on the UB $570,000 renewed loan final renewal was also

payable by BOT on the 10th of each month.

The actual interest rate percentages (percentage interest

rates) that were derived from Union Bank's LIBOR, prime, or

reference rates, as the case may be, and (1) that were applicable

to the UB $570,000 renewed loan third renewal were 10.5 percent

as of December 31, 1985, and 10 percent as of March 7, 1986, and

(2) that were applicable to the UB $570,000 renewed loan final

renewal were 10 percent initially and 9.5 percent as of April 21,

1986, where the percentage interest rate remained for the balance
- 39 -

26 After Dec. 31, 1985, interest on the UB $570,000 renewed loan

third renewal was paid on or about Jan. 24, 1986, Feb. 21, 1986,

Mar. 10, 1986, and Apr. 10, 1986. Interest on the UB $570,000

renewed loan final renewal was paid on or about Apr. 22, 1986,

June 30, 1986, and July 10, 1986.

of the period during which that renewal was outstanding.

Except for August 1984, September and November 1985, and May

1986, interest on the UB $570,000 renewed loan first through

final renewals was paid monthly.26

On July 10, 1986, the UB $570,000 renewed loan final renewal

was repaid with funds wired to Union Bank from Standard Chartered

Bank HK, and Union Bank released its lien on the Forward $570,000

deposit. (Hereinafter, the original UB $570,000 renewed loan and

the renewals of that loan will be referred to collectively as the

UB $570,000 renewed loan.)

B. UB $325,000 Loan

In April 1984, Union Bank funded a loan of $325,000 to

Radcliffe (original UB $325,000 loan) that was due on April 15,

1985. The original UB $325,000 loan was used to reduce to

$1,125,000 a loan in the amount of $1,450,000 that had been made

to NMSC by Union Bank or one of its branches or predecessors in

San Francisco and that was secured by a second deed of trust on

NMSC's buildings. To document the original UB $325,000 loan,

petitioner signed on behalf of Radcliffe a promissory note that

was made payable to Union Bank and that was in the same amount as

that loan.
- 40 -

27 The pledge of the Forward $325,000 deposit was documented by

a security agreement signed by Mme. Koo on behalf of Forward.

28 The parties stipulated that the Forward $325,000 deposit was

maintained in Standard Chartered Bank HK. Certain records of

Union Bank indicate that that deposit was placed with Standard

Chartered Bank, Singapore, through Standard Chartered Bank HK. 

Other records of Union Bank concerning that loan do not indicate

the affiliate of Union Bank in which that deposit was maintained. 

We find the meaning of those Union Bank records unclear, and,

accordingly, we do not find the parties' stipulation that the

Forward $325,000 deposit was maintained in Standard Chartered

Bank HK to be clearly contrary to the facts disclosed in the

record. Consequently, we will accept that stipulation under the

test of Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. at 195-

196.

Pursuant to a decision on April 12, 1984, of the board of

directors of Forward (viz., petitioner, Ms. Gaw, and Mme. Koo), a

$325,000 fixed deposit in the name of Forward (Forward $325,000

deposit) was pledged as security for the original UB $325,000

loan and all renewals of that loan.27 That deposit was in the

same amount as that loan and was maintained in Standard Chartered

Bank HK.28 Throughout the period April 1984 until July 10, 1986,

during which the Forward $325,000 deposit served as security for

the original UB $325,000 loan and the renewals of that loan,

Union Bank maintained a lien on that deposit.

The interest rate on the original UB $325,000 loan was set

at Union Bank's LIBOR plus 1.5 percent or its prime rate plus 1

percent. The original UB $325,000 loan was to bear interest at

Union Bank's LIBOR plus 1.5 percent if Radcliffe selected that

rate in a manner essentially the same as that described above
- 41 -

with respect to the UB $570,000 renewed loan first through third

renewals. The period for which that rate was to be in effect

could have been between one and six months. If Radcliffe did not

select the LIBOR-based rate, the UB original $325,000 loan was to

bear interest at Union Bank's prime rate plus 1 percent. The

promissory note documenting that loan provided that the interest

on that loan was payable by Radcliffe (1) at the maturity of any

period during which a LIBOR-based interest rate was in effect for

no more than six months and (2) monthly on the 15th day of each

month for any period during which a prime rate-based rate was in

effect.

Union Bank renewed the original UB $325,000 loan on two

occasions for periods that ended on the following dates: April

10, 1986 (UB $325,000 loan first renewal) and July 10, 1986 (UB

$325,000 loan final renewal). To document the UB $325,000 loan

first renewal, petitioner signed on behalf of Radcliffe a promissory note that was made payable to Union Bank and that was in the

same amount as that loan.

The interest rate on the UB $325,000 loan first renewal was

set at Union Bank's LIBOR plus 1.5 percent or its prime rate plus

1 percent. That renewal was to bear interest at the LIBOR-based

rate if that rate were selected by Radcliffe in a manner essentially the same as that described above with respect to the UB

$570,000 renewed loan first through third renewals. If Radcliffe
- 42 -

29 The Apr. 22, 1986 interest payment also included interest

paid on the UB $325,000 loan final renewal.

did not select the LIBOR-based interest rate, the UB $325,000

loan first renewal was to bear interest at Union Bank's prime

rate plus 1 percent. The promissory note documenting the UB

$325,000 loan first renewal provided that the interest due on

that renewal was payable by Radcliffe on the 10th of each month. 

The following percentage interest rates were applicable for the

following periods with respect to the UB $325,000 loan first

renewal:

 Percentage

 Period Interest Rate

Apr. 15, 1985, until May 20, 1985 11.5

May 20, 1985, until June 18, 1985 11.0

June 18, 1985, until Mar. 7, 1986 10.5

Mar. 7, 1986, until Apr. 10, 1986 10.0

Interest on the UB $325,000 loan first renewal was paid on or

about the following dates:

May 14, 1985

June 12, 1985

July 10, 1985

Aug. 13, 1985

Sept. 13, 1985

Oct. 16, 1985

Nov. 18, 1985

Dec. 11, 1985

Jan. 23, 1986

Feb. 18, 1986

Mar. 12, 1986

Apr. 22, 198629

The interest rate on the UB $325,000 loan final renewal was

set at Union Bank's reference rate plus 1 percent and was payable
- 43 -

30 In 1983, pursuant to a request made on behalf of the Gaw

family, Union Bank released its lien on the Multi-Credit fixed

(continued...)

by Radcliffe on the 10th of each month. The percentage interest

rate applicable to the UB $325,000 loan final renewal was initially 10 percent, and, as of April 21, 1986, it was 9.5 percent

where it remained for the balance of the period during which that

renewal was outstanding. Interest on the UB $325,000 loan final

renewal was paid on or about the following dates: April 22,

1986, June 30, 1986, and July 10, 1986.

The UB $325,000 loan final renewal was repaid on July 10,

1986, using funds wired to Union Bank from Standard Chartered

Bank HK, and Union Bank released its lien on the Forward $325,000

deposit. (Hereinafter, the original UB $325,000 loan and the renewals of that loan will be referred to collectively as the UB

$325,000 loan.)

C. UB $800,000 Radcliffe Loan

On or about June 27, 1985, at the request of petitioner,

Radcliffe assumed a loan of $800,000 (original UB $800,000

Radcliffe loan). The loan assumed by Radcliffe had been made to

NMSC by Union Bank or one of its branches or predecessors in San

Francisco (UB $800,000 NMSC loan) sometime prior to the years at

issue and had been secured by a fixed deposit in the same amount

as that loan that was maintained in Standard Chartered Bank HK in

the name of Multi-Credit.30 The original UB $800,000 Radcliffe
- 44 -

30(...continued)

deposit that was securing the UB $800,000 NMSC loan during MultiCredit's two-week financial reporting period.

31 The $800,000 deposit in the name of Multi-Credit had been

made in that bank prior to the time it was pledged to secure the

original UB $800,000 Radcliffe loan.

32 Petitioner, as managing director of Multi-Credit, signed on

behalf of Multi-Credit a security agreement dated Mar. 18, 1986,

pledging the Multi-Credit $800,000 deposit in Standard Chartered

Bank, Singapore, as security for the payment and performance of

Radcliffe's obligations to Union Bank, irrespective of the manner

in which or the time at which those obligations arose or would

arise.

loan was due on April 10, 1986. To document that loan, petitioner signed on behalf of Radcliffe a promissory note that was

made payable to Union Bank and that was in the same amount as

that loan.

Pursuant to a decision on June 6, 1985, of the board of

directors of Multi-Credit, of which petitioner was managing

director, an $800,000 fixed deposit in the name of Multi-Credit

in Standard Chartered Bank HK and all renewals of that deposit

(Multi-Credit $800,000 deposit)31 were pledged as security for

the original UB $800,000 Radcliffe loan and the renewal of that

loan. The Multi-Credit $800,000 deposit was in the same amount

as that loan and was maintained in Standard Chartered Bank HK

until March 5, 1986, when that deposit was transferred to Standard Chartered Bank, Singapore.32 Throughout the period from on

or about June 27, 1985, until July 23, 1986, during which the

Multi-Credit $800,000 deposit served as security for the original
- 45 -

UB $800,000 Radcliffe loan and the renewal of that loan, Union

Bank maintained a lien on that deposit.

The interest rate on the original UB $800,000 Radcliffe loan

was set at Union Bank's LIBOR plus 1.5 percent or its reference

rate plus 1 percent. That loan was to bear interest at Union

Bank's LIBOR plus 1.5 percent if Radcliffe selected that rate in

a manner essentially the same as that described above with

respect to the UB $570,000 renewed loan first through third

renewals. The period for which that rate was to be in effect

could have been between one and six months. If Radcliffe did not

select the LIBOR-based rate, the UB $800,000 Radcliffe loan was

to bear interest at Union Bank's reference rate plus 1 percent. 

The promissory note documenting that loan provided that interest

was payable by Radcliffe on the 10th of each month. The percentage interest rate on the original UB $800,000 Radcliffe loan

was initially 10.91 percent, and, as of October 15, 1985, it was

10.14 percent where it remained until that loan became due. 

Interest on that loan was paid on or about October 31, 1985.

During the period in which the Multi-Credit $800,000 deposit

was in Standard Chartered Bank HK, it was used to purchase fixed

time deposits in that bank, as follows:
- 46 -

33 The parties agree on brief that the interest payable in 1985

and 1986 on all the fixed time deposits purchased with the MultiCredit $800,000 deposit was deposited into an account in the name

of Multi-Credit in Standard Chartered Bank HK. The parties'

agreement is contrary to the record in the case of six of the

fixed time deposits purchased with the Multi-Credit $800,000

deposit from June 1985 until February 1986. In the case of two

of those deposits, the record does not disclose whether or not

the parties' agreement is correct.

 Interest Rate

 Term of Fixed Time Deposits on Fixed Time Deposits

June 27, 1985, until July 30, 1985 7.50

July 30, 1985, until Aug. 30, 1985 * 

Aug. 30, 1985, until Oct. 2, 1985 7.75

Oct. 2, 1985, until Nov. 4, 1985 7.75

Nov. 4, 1985, until Dec. 4, 1985 7.8125

Dec. 4, 1985, until Jan. 6, 1986 8.00

Jan. 6, 1986, until Feb. 6, 1986 7.875

Feb. 6, 1986, until Mar. 6, 1986 7.75

* Interest rate not disclosed by the record.

The interest on each of the foregoing fixed time deposits

was payable on its maturity date. The interest payable on each

of those deposits was (1) included in the amount used to purchase

the succeeding fixed time deposit in the case of three such

deposits, (2) was ultimately credited to an account in the name

of Pioneer in the case of all but two such deposits, and (3) was

disposed of in a manner not disclosed by the record in the case

of those two deposits.33

The original UB $800,000 Radcliffe loan was renewed in 1986

(UB $800,000 Radcliffe renewed loan). That renewed loan was due

on July 10, 1986, although it was not repaid until July 23, 1986. 
- 47 -

The interest rate on the UB $800,000 Radcliffe renewed loan was

set at Union Bank's LIBOR plus 1.5 percent and was payable by

Radcliffe on the 10th of each month. The percentage interest

rate on the UB $800,000 Radcliffe renewed loan was 10.14 percent. 

Interest on that loan was paid on or about June 30, 1986, and

July 23, 1986.

During the period in which the Multi-Credit $800,000 deposit

was in Standard Chartered Bank, Singapore, it was used to purchase fixed time deposits in that bank, as follows:

 Interest Rate 

 Term of Fixed Time Deposits on Fixed Time Deposits

Mar. 6, 1986, until Apr. 7, 1986 7.6875

Apr. 7, 1986, until May 8, 1986 7.7 to 6.7

May 8, 1986, until June 9, 1986 6.6875

June 11, 1986,* until July 10, 1986 6.8750

*On June 10, 1986, the Multi-Credit $800,000 deposit was maintained in a call deposit account with respect to which $145.33 of

interest was paid.

The interest on each of the foregoing $800,000 fixed time

deposits was payable on its maturity date. None of the interest

payable on any of those fixed time deposits was included in the

amount used to purchase the succeeding fixed time deposit. The

interest payable on one of those fixed time deposits was credited

to an account in the name of Pioneer.

On July 23, 1986, approximately two weeks after it was due,

the renewal of the UB $800,000 Radcliffe loan was repaid with 

(1) $200,000 that had been wired to Union Bank from Standard

Chartered Bank HK on or about July 10, 1986, and (2) $600,000
- 48 -

34 The record is not clear as to whether those funds were wired

from Bangkok Bank Ltd. headquarters, the Hong Kong branch of that

bank, or another branch of that bank.

that had been wired to Union Bank from Bangkok Bank Ltd.34 on or

about July 23, 1986. When that loan was repaid, Union Bank

released its lien on the Multi-Credit $800,000 deposit in Standard Chartered Bank, Singapore. (Hereinafter, the original UB

$800,000 Radcliffe loan and the renewal of that loan will be

referred to collectively as the UB $800,000 Radcliffe loan.)

D. UB $1,300,000 Loan

On March 20, 1984, Union Bank funded a $1,300,000 loan to

Radcliffe (original UB $1,300,000 loan) that was due on July 16,

1984. To document the original UB $1,300,000 loan, petitioner

and Ms. Gaw signed on behalf of Radcliffe a promissory note that

was made payable to Union Bank and that was in the same amount as

that loan. Pursuant to instructions, dated March 14, 1984, from

petitioner and Ms. Gaw on behalf of Radcliffe, the proceeds of

the original UB $1,300,000 loan were used to acquire from Union

Bank on March 20, 1984, a certificate of deposit that was issued

in the name of Pioneer (Pioneer $1,300,000 CD).

Pursuant to a decision on March 14, 1984, of the board of

directors of Pioneer, of which petitioner was managing director

and chairman and Ms. Gaw was a director, the Pioneer $1,300,000

CD was pledged as security for the original UB $1,300,000 loan. 

That certificate of deposit was issued on March 20, 1984, the
- 49 -

same date on which the original UB $1,300,000 loan was funded,

and matured on July 16, 1984, the same date on which that loan

was due. Throughout the period March 20, 1984, until July 16,

1984, during which the Pioneer $1,300,000 CD served as security

for the original UB $1,300,000 loan, Union Bank maintained a lien

on the deposit represented by that certificate of deposit.

By letter dated July 2, 1984 (July 2, 1984 Pioneer letter),

petitioner and Ms. Gaw instructed Union Bank on behalf of Pioneer

to transfer the deposit represented by the Pioneer $1,300,000 CD

on the date on which that certificate of deposit matured (viz.,

July 16, 1984) into the name of Mandalay, a wholly owned subsidiary of Pioneer. That letter also instructed Union Bank that

the $1,300,000 certificate of deposit in the name of Mandalay

(original Mandalay $1,300,000 CD) was to be pledged to secure the

original UB $1,300,000 loan. In accordance with that letter,

and, pursuant to a decision on July 2, 1984, of the board of

directors of Mandalay, of which petitioner was president and Ms.

Gaw was executive director and secretary, the original Mandalay

$1,300,000 CD and the renewals thereof were pledged as security

for the renewals of the original UB $1,300,000 loan. Throughout

the period July 16, 1984, until July 10, 1986, during which the

original Mandalay $1,300,000 CD and the renewals of that certificate of deposit served as security for the renewals of that loan,

Union Bank maintained a lien on the deposit represented thereby.
- 50 -

35 Interest on the original Mandalay $1,300,000 CD was paid on

Aug. 16, 1984, and Sept. 17, 1984.

The interest rate on the original UB $1,300,000 loan was set

at 1.15 percent above the interest rate on the Pioneer $1,300,000

CD. The interest rate on the original UB $1,300,000 loan was

11.5 percent, and the interest payable on the Pioneer $1,300,000

CD was 10.35 percent. The promissory note documenting that loan

provided that the interest on it was payable by Radcliffe monthly.

Union Bank renewed the original UB $1,300,000 loan on three

occasions for periods that ended on the following dates: April

15, 1985, April 10, 1986, and July 10, 1986. To document each of

the first two renewals of the original UB $1,300,000 loan, petitioner and Ms. Gaw signed on behalf of Radcliffe a promissory

note that was payable to Union Bank and that was in the same

amount as that loan.

The interest rates on all three renewals of the original UB

$1,300,000 loan were set at 1.15 percent above the interest rate

on the original Mandalay $1,300,000 CD and the renewals of that

certificate of deposit (which ranged between 6.6 and 11.45 percent). Interest on all three renewals of the original UB

$1,300,000 loan was payable by Radcliffe monthly.

When the original Mandalay $1,300,000 CD matured on October

16, 1984,35 it was renewed 19 times for successive periods consisting of one three-month renewal and 18 one-month renewals. 
- 51 -

The 19th and final renewal of that certificate matured on July

10, 1986, the same date on which the final renewal of the original UB $1,300,000 loan was due. The dates on which the other two

renewals of the original UB $1,300,000 loan were due coincided

with the dates on which two of the one-month renewals of the

original Mandalay $1,300,000 CD matured (viz., April 15, 1985,

and April 10, 1986).

Throughout the period during which the original Mandalay

$1,300,000 CD and the renewals thereof were outstanding, the

interest on those certificates was payable by Union Bank monthly. 

The interest on each of the one-month renewals of the original

Mandalay $1,300,000 CD was payable by Union Bank on its maturity

date, which occurred at approximately mid-month. In the July 2,

1984 Pioneer letter, petitioner and Ms. Gaw instructed Union Bank

on behalf of Mandalay that the interest on the original Mandalay

$1,300,000 CD and the renewals thereof was to be credited monthly

to an account maintained in the name of Pioneer at Union Bank.

On July 10, 1986, the final renewal of the original UB

$1,300,000 loan was repaid with the proceeds represented by the

final renewal of the original Mandalay $1,300,000 CD. (Hereinafter, the original UB $1,300,000 loan and the renewals of that

loan will be referred to collectively as the UB $1,300,000 loan,

and the original Mandalay $1,300,000 CD and the renewals of that

certificate of deposit will be referred to collectively as the

Mandalay $1,300,000 CD.)
- 52 -

E. UB $1,830,000 Loan

In August 1984, Union Bank funded a $1,830,000 loan to BOT

(original UB $1,830,000 loan) that was due on July 15, 1985. 

Pursuant to instructions of petitioner on behalf of BOT, the

proceeds of that loan were used to acquire from Union Bank a

$1,830,000 certificate of deposit that was issued in the name of

Pempire (original Pempire $1,830,000 CD). To document the original UB $1,830,000 loan, petitioner signed on behalf of BOT a

promissory note that was made payable to Union Bank and that was

in the same amount as that loan.

Pursuant to a decision on July 18, 1984, of the board of

directors of Pempire, of which petitioner was chairman and president, the original Pempire $1,830,000 CD and the renewals thereof

were pledged as security for the original UB $1,830,000 loan and

the renewals of that loan. That certificate of deposit was

issued on August 13, 1984, and matured on July 15, 1985, the same

date on which the original UB $1,830,000 loan was due. Throughout the period August 1984 until July 10, 1986, during which the

original Pempire $1,830,000 CD and the renewals thereof served as

security for the original UB $1,830,000 loan and the renewals of

that loan, Union Bank maintained a lien on the deposit represented thereby.

The interest rate on the original UB $1,830,000 loan was set

at 1.15 percent above the interest rate on the original Pempire

$1,830,000 CD. The interest rate on the original UB $1,830,000
- 53 -

loan was 12.95 percent, and the interest rate on the original

Pempire $1,830,000 CD was 11.8 percent. The promissory note

documenting the original UB $1,830,000 loan provided that the

interest on that loan was payable by BOT semiannually.

Union Bank renewed the original UB $1,830,000 loan on three

occasions for periods that ended on the following dates: October

10, 1985 (UB $1,830,000 loan first renewal), April 10, 1986 (UB

$1,830,000 loan second renewal), and July 10, 1986 (UB $1,830,000

loan final renewal). To document each of the first two renewals

of the original UB $1,830,000 loan, petitioner signed on behalf

of BOT a promissory note that was made payable to Union Bank and

that was in the same amount as that loan. The interest rate on

all three renewals of the original UB $1,830,000 loan was set at

1.15 percent above the interest rate on the renewals of the

original Pempire $1,830,000 CD (which ranged between 6.6 and 7.9

percent). The interest on the UB $1,830,000 loan first renewal

was payable by BOT at that loan's maturity. The interest on the

UB $1,830,000 loan second and final renewals was payable by BOT

monthly.

When the original Pempire $1,830,000 CD matured on July 15,

1985, it was renewed 10 times for successive periods consisting

of three one-month renewals, one three-month renewal, and six

one-month renewals. The 10th and final renewal of that certificate matured on July 10, 1986, the same date on which the final

renewal of the original UB $1,830,000 loan was due. The dates on
- 54 -

36 Six payments of interest were made at or shortly after the

maturity dates of certain renewals of the original Pempire

$1,830,000 CD. Three payments of interest were credited to

Pempire's account with Union Bank, and two payments of interest

were credited to Pempire's account without indicating the bank in

which that account was maintained.

which the other two renewals of the original UB $1,830,000 loan

were due either coincided with or were close to the dates on

which two of the one-month renewals of the original Pempire

$1,830,000 CD matured (viz., October 10, 1985, and April 10,

1986).36 Union Bank made six interest payments on or shortly

after the maturity dates of certain of the renewals of the

original Pempire $1,830,000 CD.

On July 10, 1986, Union Bank repaid the UB $1,830,000 loan

final renewal with the proceeds represented by the final renewal

of the original Pempire $1,830,000 CD. (Hereinafter, the original UB $1,830,000 loan and the renewals of that loan will be

referred to collectively as the UB $1,830,000 loan, and the

original Pempire $1,830,000 CD and the renewals of that certifi--

cate of deposit will be referred to collectively as the Pempire

$1,830,000 CD.)

F. Facts Pertaining to All the Transactions

at Issue Involving Union Bank 

At least as early as August 1984, Union Bank became concerned that the cash deposits that had been pledged by the

foreign corporations in question as security for the loans it had

funded to Radcliffe and to BOT that are at issue herein might
- 55 -

constitute fraudulent conveyances under California law, in which

event Union Bank believed that it might be deprived of an enforceable security interest in those deposits. In order to

address that concern, Union Bank sought from petitioner, inter

alia, financial information relating to the foreign corporations

that pledged cash collateral for those loans and statements that

those corporations owned Radcliffe and/or BOT. Union Bank did

not receive the information it requested from petitioner. 

Consequently, it requested its affiliate Standard Chartered Bank

HK to guarantee its loans to Radcliffe and to BOT that are at

issue herein. That guarantee was to be secured by the cash

deposits that had been pledged as security for those loans. 

Despite Union Bank's concerns about possible fraudulent conveyances under California law and although Standard Chartered Bank

HK did not provide the guarantee requested by Union Bank, Union

Bank renewed on one or more occasions the loans it had funded to

Radcliffe and to BOT as they became due during the years at

issue.

In February 1986, petitioner requested Union Bank to consider making a new loan to Radcliffe and/or BOT in the amount of

$8,400,000, an amount that was approximately equal to the then

outstanding balances of the loans at issue that had been funded

by Bangkok Bank LA branch and by Union Bank to Radcliffe and BOT. 
- 56 -

37 The Mar. 3, 1986 letter was prompted by petitioner's request

that the loans that Union Bank had funded to Radcliffe and to BOT

and that are at issue herein be renewed at interest rates that

were to be set at 1 percentage point in excess of the interest

rates on the various deposits that secured those loans. It

appears to us that, in early 1986, petitioner was pursuing at

least two alternative possible courses of action for restructuring the loans at issue involving Union Bank: (1) replacing them

(along with the Bangkok Bank LA branch loans) with a new loan

secured by the buildings of NMSC and 300 Montgomery Associates

(see discussion above) and (2) altering the manner in which the

interest rates on the then outstanding Union Bank loans were to

be determined.

That new loan was to be secured by the buildings owned by NMSC

and 300 Montgomery Associates.

A letter dated March 3, 1986 (March 3, 1986 letter) from

Henry Yung, an officer of Union Bank, to Patrick Kwok of Standard

Chartered Bank HK, an affiliate of Union Bank,37 indicated that,

when Union Bank's weighted average interest rate on the loans it

had outstanding to Radcliffe and to BOT (viz., the UB $570,000

renewed loan, the UB $325,000 loan, the UB $800,000 Radcliffe

loan, the UB $1,300,000 loan, and the UB $1,830,000 loan) was

compared to its weighted average cost of funds and overhead

costs, it was losing money on those loans. The March 3, 1986

letter further indicated that Union Bank was losing money on

those loans even when earnings from deposits that were not

connected with such loans were taken into account. Mr. Yung also

stated in that letter that Union Bank nonetheless was willing to

renew the loans it had funded to Radcliffe and to BOT on terms

that would allow it to break even on them. In this regard, the
- 57 -

March 3, 1986 letter indicated that Union Bank was "pleased to

have the opportunity to accommodate this valued Group customer

[petitioner] and will entertain all reasonable requests."

The loans to Radcliffe and to BOT by Union Bank that are at

issue in these cases did not provide that bank with an opportunity to make a profit.

IV. Transaction Involving Horbury

During relevant periods, Horbury Holdings B.V. (Horbury),

which was incorporated in the Netherlands in 1982, was a subsidiary of Asselwell Mondial N.V. (Asselwell), and Asselwell,

which was incorporated in the Netherlands Antilles, was a subsidiary of a foreign subsidiary of Pioneer.

BOT claimed a deduction of $151,722 for interest paid to

Horbury in its 1984 Federal income tax return.

V. Income or Loss Reported by Radcliffe

and by BOT for the Years at Issue 

In their Federal income tax returns (income tax returns) for

the years at issue, Radcliffe and BOT reported the following

amounts of taxable income or loss:

 Year Radcliffe BOT

 1984 ($809,615) $93,026

 1985 (835,080) (168,669)

 1986 (894,322) (310,024)

The foregoing results reported by Radcliffe and by BOT were

generated in part by deductions for interest paid that they

claimed in their respective income tax returns for the years at
- 58 -

issue. Specifically, in its income tax returns for the years at

issue, Radcliffe claimed the following deductions for interest

paid to Bangkok Bank LA branch:

 Year Amount

 1984 $73,791

 1985 194,289

 1986 211,719

In its income tax returns for the years at issue, Radcliffe

claimed the following deductions for interest paid to Union Bank:

 Year Amount

 1984 $144,427

 1985 220,171

 1986 120,008

In its income tax returns for the years at issue, BOT

claimed the following deductions for interest paid to Union Bank:

 Year Amount

 1984 $167,448

 1985 233,853

 1986 119,260

 OPINION

In determining that petitioner is liable for the deficiencies in, additions to, and penalties on withholding tax that she

determined with respect to Radcliffe and BOT, respondent relies

on the transferee liability provisions of section 6901. Petitioner does not dispute that he would be liable as a transferee

of each of those taxpayers under section 6901 for those deficiencies in, additions to, and penalties on tax in the event the
- 59 -

38 Radcliffe and BOT each distributed property with a net value

of not less than $1,000,000 to petitioner as sole shareholder. 

The net value of the property so distributed by Radcliffe and by

BOT exceeds the respective amounts of the deficiencies, additions

to tax, and penalties that respondent determined against petitioner as a transferee of Radcliffe and of BOT.

Court were to sustain respondent's determinations with respect to

Radcliffe and BOT.38 Consequently, in the event we were to

sustain respondent's determinations with respect to Radcliffe and

BOT, respondent would have satisfied her burden under section

6902(a) of proving that petitioner is liable as a transferee of

each of those corporations.

The principal dispute in these cases is whether the determinations with respect to Radcliffe and BOT should be sustained. 

Petitioner bears the burden of demonstrating that those determinations are erroneous. See sec. 6902(a); Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933); Zmuda v. Commissioner, 731

F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982).

Before turning to the various issues presented in these

cases, we note that we have given due consideration to all of the

parties' arguments and contentions with respect to those issues,

even though we do not attempt to address each of them herein.

I. Evidentiary Matters

Petitioner has attempted to satisfy his burden of proof

through testimonial and documentary evidence. Petitioner was the

principal witness on his behalf. We found him to be glib and at
- 60 -

39 Petitioner also claims that during the years at issue Mme.

Koo and/or her family owned Vidda, a corporation to whose account

in Standard Chartered Bank HK certain interest due on certain of

the cash deposits that secured BB Loan Nos. 2 and 3 was credited.

times vague, evasive, inconsistent, and conclusory in his testimony. In addition, based on our observation of petitioner's

demeanor at trial, we generally did not find him to be credible. 

In these circumstances, we are not required to, and we generally

do not, accept petitioner's self-serving and uncorroborated

testimony. See Geiger v. Commissioner, 440 F.2d 688, 689-690

(9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159; Wood v.

Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C.

593 (1964); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). We

generally found the other witnesses who testified to be credible.

A. The Adverse Inference Rule--

Mme. Koo's Failure To Testify

Mme. Koo, petitioner's mother-in-law, did not testify. 

Petitioner claims on brief that she owned certain of the corporations (viz., Intercontinental, Double Wealth, Traveluck, Forward,

and Pioneer) that pledged cash deposits as security for a number

of the loans at issue.39 Citing Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d 513 (10th Cir.

1947), respondent urges us to apply the so-called adverse

inference rule and to infer from petitioner's failure to call

Mme. Koo that her testimony would have been unfavorable to

petitioner. Relying principally on Wynn v. United States, 397
- 61 -

40 We also disagree with petitioner's reading of the other

authorities to which he cites, viz., Burgess v. United States,

440 F.2d 226, 235 (D.C. Cir. 1970) (Robinson, J., concurring);

Savard v. Marine Contracting Inc., 471 F.2d 536, 542 (2d Cir.

1972); In re Stader, 90 Bankr. 29, 32 n.8 (Bankr. D. Conn. 1988);

and 2 Wigmore on Evidence, sec. 286, at 200 (Chadbourn rev.

1979). Judge Robinson began his concurring opinion in the

Burgess case with a discussion of the adverse inference rule and

his assumption that the missing witness in that case was amenable

to subpoena. However, that Judge Robinson made that assumption

does not mean to us that it is his view or, more importantly, the

view of the U.S. Court of Appeals for the District of Columbia

Circuit that a witness must in all events be amenable to subpoena

before being considered within a party's power to produce for

purposes of the adverse inference rule. Burgess v. United

States, supra at 235. Both the Savard and Stader cases indicate

that evidence must be within a party's control before a negative

inference will be drawn from that party's failure to produce that

evidence. However, as will be discussed below, for purposes of

the adverse inference rule, evidence may be within a party's

control even if it is not subject to production by subpoena. See

United States v. Martin, 696 F.2d 49, 52 (6th Cir. 1983). 

Similarly, the statement in 2 Wigmore on Evidence, sec. 286, at

200, relied on by petitioner (viz., the "lack of power [to

produce] may be due to the person's absence from the jurisdiction") does not indicate to us that such an absence necessarily

means that for purposes of the adverse inference rule a party is

considered to be powerless to produce the witness.

F.2d 621, 625-626 (D.C. Cir. 1967), petitioner contends that

since Mme. Koo, an alleged resident of Hong Kong, could not have

been subpoenaed to appear at the trial of these cases, an adverse

inference should not be drawn from her failure to testify. We

disagree with petitioner's reading of the Wynn case.40

The burden of proof is on petitioner with respect to respondent's determinations against Radcliffe and BOT, and we cannot

assume that missing evidence would be favorable to him. See

Kamborian v. Commissioner, 56 T.C. 847, 869 (1971), affd. 469
- 62 -

F.2d 219 (1st Cir. 1972); Pollack v. Commissioner, 47 T.C. 92,

108 (1966), affd. 392 F.2d 409 (5th Cir. 1968). Indeed, the

usual inference is that such evidence would be unfavorable. See

Pollack v. Commissioner, supra; see also 2 Wigmore on Evidence,

sec. 285(1), at 192 (Chadbourn rev. 1979). Where a party fails

to call a witness peculiarly within the power of that party to

produce and the testimony of that witness would elucidate the

matters at issue, it generally is permissible under the adverse

inference rule to infer that the witness' testimony would have

been unfavorable. See Graves v. United States, 150 U.S. 118,

120-121 (1893); United States v. Rollins, 862 F.2d 1282, 1297-

1298 (7th Cir. 1988); see also 2 McCormick on Evidence, sec. 264,

at 185 (4th ed. 1992).

In Wynn v. United States, supra, the U.S. Court of Appeals

for the District of Columbia Circuit, to which an appeal in these

cases would normally lie, considered on its own initiative the

question of whether an adverse inference could be drawn against a

criminal defendant for failing to present certain witnesses he

claimed would support his alibi defense. The Court of Appeals

stated that the record did not disclose whether any of those

uncalled witnesses was within the power, much less peculiarly

within the power, of that defendant to produce. In a footnote,

the court gave what it described as a "partial enumeration" of

the circumstances relevant to resolving that question that were
- 63 -

41 We note that in Harry v. Safeway Stores, Inc., 215 F. Supp.

324, 325-327 (D.D.C. 1963), the U.S. District Court for the

District of Columbia, the court in accordance with whose rules of

evidence we conduct our trials, Rule 143(a), found that a jury

was permitted to draw a negative inference from a defendant's

failure to call a former employee who was apparently living in

Florida at the time of trial. That court found that the jury

could infer that that witness was peculiarly available to the

defendant because of the witness' past employment relationship

with the defendant, the defendant's apparent knowledge of where

the witness could be reached, and the lack of a satisfactory

explanation for his absence. Id. We note that, at the time the

Harry case was decided, Fed. R. Civ. P. 45(e) provided that a

subpoena for attendance at trial generally could be served within

the district where trial was held or within 100 miles of that

place. Fed. R. Civ. P. 45(e), 28 U.S.C. app. at 5167 (1958). 

Accordingly, it seems that the missing witness in Harry v.

Safeway Stores, Inc., supra, was beyond the subpoena power of the

(continued...)

not disclosed by the record in that case, including the "physical

amenability to subpoena" of those witnesses. Id. at 625 & n.23. 

Thus, Wynn merely indicates that physical amenability to subpoena

is simply one of a number of different factors to be considered

in determining whether an uncalled witness is within a party's

power to produce for purposes of the adverse inference rule. It

does not stand for the proposition that such a witness is always

beyond the power of a party to produce for purposes of that rule

when that witness is not subject to subpoena.

Petitioner has not cited, and our research has not disclosed, any case decided by the Court of Appeals for the District

of Columbia Circuit involving the adverse inference rule where

that court has considered a situation in which an uncalled

witness was beyond the subpoena power of the court.41 However,
- 64 -

41(...continued)

District Court for the District of Columbia.

42 For purposes of applying the adverse inference rule, other

courts have concluded that the question whether a witness is

within the power of a party to produce is generally to be determined by taking account of various factors, including the witness' accessibility to the service of a subpoena upon him and the

relationship of the witness to that party. See United States v.

Johnson, 467 F.2d 804, 808-809 (1st Cir. 1972); McClanahan v.

United States, 230 F.2d 919, 926 (5th Cir. 1956).

other U.S. Courts of Appeals have addressed situations where

uncalled witnesses were beyond their subpoena power and have

concluded that an adverse inference may be drawn against a party

from the failure to present a witness even where that witness may

not be subpoenaed by that party. See United States v. Martin,

696 F.2d 49, 52 (6th Cir. 1983); United States v. Lehmann, 613

F.2d 130, 135-136 (5th Cir. 1980); see also A.B. Dick Co. v.

Burroughs Corp., 798 F.2d 1392, 1400 & n.9 (Fed. Cir. 1986). For

example, in Martin, the Court of Appeals for the Sixth Circuit

concluded that the friendship with one of the parties of certain

uncalled witnesses who lived in Canada rendered those witnesses

within the power of that party to produce, notwithstanding that

those witnesses were beyond the subpoena power of the Federal

courts.42 United States v. Martin, supra.

We have found based on the record in these cases that

petitioner and Mme. Koo had close and amicable business and
- 65 -

43 Petitioner's relationships with his mother-in-law Mme. Koo

contrast sharply with his relationships with his mother and

siblings, which both he and his brother, Henry Gaw, testified

were hostile. Union Bank records also indicate that that bank

understood that there was disunity among members of S.C. Gaw's

family following his death and that each member of that family

was responsible for his or her own activities.

44 By way of illustration, petitioner testified that he became

managing director of Pioneer in 1973 at Mme. Koo's behest and

that he was able to borrow from, and give guarantees for more

than what he was worth to, banks in Hong Kong because those banks

knew that Mme. Koo would honor his obligations if the need arose. 

Documentary evidence in the record shows Mme. Koo's involvement

in transactions with respect to the pledges of cash deposits by

Double Wealth and Forward for certain of the loans at issue,

e.g., her signature on documents of Double Wealth and Forward

connected with the pledge of those corporations' deposits as

security for those loans.

family relationships prior to and during the years at issue.43

Mme. Koo is, and was during and preceding the years at issue,

petitioner's mother-in-law. Thus, she would ordinarily be

expected to favor him. In fact, the record discloses that she

did favor him with respect to various business transactions.44

The failure of a party to call as a witness a relative who would

ordinarily be expected to favor that party suggests that that

relative's testimony would be unfavorable. See Steiner v.

Commissioner, 350 F.2d 217, 222-223 (7th Cir. 1965), affg. T.C.

Memo. 1963-128; Stoumen v. Commissioner, 208 F.2d 903, 907 (3d

Cir. 1953), affg. a Memorandum Opinion of this Court dated Mar.

13, 1953. 

 On the present record, we find that Mme. Koo was within

petitioner's power to produce for purposes of the adverse in-
- 66 -

45 In addition to petitioner's close and amicable business and

family relationships with Mme. Koo, it is noteworthy that although petitioner did not attempt to depose Mme. Koo prior to

trial, on May 10, 1994, well after these cases were submitted and

after the parties had filed their briefs, petitioner (1) filed a

motion to reopen the record that the Court denied by order dated

May 26, 1994, and (2) lodged an application to take the deposition of Mme. Koo in Hong Kong. Thus, Mme. Koo was willing to be

deposed for purposes of these cases after the trial herein and

after respondent's opening brief advancing the adverse inference

rule with respect to Mme. Koo had been served on petitioner. 

ference rule, notwithstanding her alleged residence in Hong

Kong.45

 We turn now to the requirement of the adverse inference rule

that an uncalled witness not only must be within a party's power

to produce but also must be "peculiarly" within that party's

power to produce before such an inference may be drawn against

that party. See United States v. Rollins, 862 F.2d at 1297-1298. 

If a witness is "equally available" to both parties and neither

calls that witness at trial, no adverse inference is warranted. 

See Kean v. Commissioner, 469 F.2d 1183, 1188 (9th Cir. 1972),

affg. in part, revg. in part 51 T.C. 337 (1968). For this

purpose, an uncalled witness is not equally available to the

party requesting that the inference be drawn against the other

party, and thus is peculiarly within the other party's power to

produce, where that witness' relationship to that other party is

such that the witness is likely to favor that other party. See

id.; McClanahan v. United States, 230 F.2d 919, 925 (5th Cir.

1956).
- 67 -

On the instant record, we find that Mme. Koo's business and

family relationships with petitioner are such that she would

likely favor petitioner, and therefore she was not equally

available to respondent for purposes of the adverse inference

rule. We further find that Mme. Koo was peculiarly within

petitioner's power to produce for purposes of that rule.

Before applying the adverse inference rule, another requirement must be satisfied, that is to say, the testimony of the

missing witness must elucidate the matters at issue, and not be

merely cumulative. See United States v. Rollins, supra; 2

McCormick on Evidence, sec. 264, at 185. On the instant record,

we find that Mme. Koo's testimony would have elucidated the

transactions at issue and would not have been merely cumulative. 

During the years at issue, petitioner was managing director and

chairman of Pioneer and a director of Forward. During 1985, he

was a director of Traveluck and a director and officer of Double

Wealth. While petitioner might arguably have been in as good a

position as Mme. Koo to know of certain circumstances relevant to

these cases, there are disputed matters, such as the ownership of

Pioneer and the other foreign corporations petitioner claims Mme.

Koo owned, which her testimony would have elucidated. Mme. Koo

also would have been in a better position than petitioner to

testify concerning the intentions and actions of the corporations

that petitioner claims she owned with respect to the loan trans-
- 68 -

actions at issue, and she may have been able to supply information concerning matters as to which petitioner claimed ignorance,

such as the source of the deposits made by Forward that were used

as collateral.

We also note that the failure of a party to call available

witnesses to corroborate that party's testimony can justify

drawing an adverse inference from their absence. See Frierdich

v. Commissioner, 925 F.2d 180, 185 (7th Cir. 1991), affg. T.C.

Memo. 1989-393; see also Stoumen v. Commissioner, supra. Petitioner's testimony was at times vague, evasive, and conclusory,

his credibility was challenged by respondent on cross-examination, and, based on our observation of his demeanor at trial, we

generally did not find him to be credible. The testimony of a

corroborating witness, such as Mme. Koo, would not have been

merely cumulative.

In order to avoid having an adverse inference drawn from the

failure to present a witness, a party may attempt, as petitioner

does here, to explain the reason that witness was not called. 

See Case v. New York Central R.R., 329 F.2d 936, 937-938 (2d Cir.

1964); Schumacher v. United States, 216 F.2d 780, 787-788 (8th

Cir. 1954). If the failure to present a witness is not satisfactorily explained, we may draw an adverse inference from that

witness' absence. See Pollack v. Commissioner, 47 T.C. at 108.
- 69 -

46 We note first that petitioner could have requested, but did

not request, that trial be held in Hawaii, which might have ameliorated the alleged difficulty of Mme. Koo's traveling to San

Francisco where the trial was held. We also note that petitioner's contentions appear to be inconsistent. If Mme. Koo's inability to attend trial was due to her age and the distance that

she may have had to travel to San Francisco, those circumstances

could not have been ameliorated by the scheduling of the trial.

 Petitioner also suggests on brief that Mme. Koo made travel

plans in reliance on the Court's indication in a telephonic conference call with counsel for the parties prior to the start of

the trial session on which these cases were calendared that it

would try to schedule the trial of these cases in the second week

of its session. Petitioner, in his application to take Mme.

Koo's deposition that was lodged with the Court on May 10, 1994,

well after the record in these cases was closed, further alleges

that Mme. Koo planned to travel to the United States on July 15,

1994. Petitioner's suggestion that Mme. Koo made travel plans in

reliance on the Court's comment in a telephonic conference with

counsel for the parties and his representation in his application

to take her deposition well after trial indicate that Mme. Koo

was able to travel, which undercuts petitioner's contention that

Mme. Koo did not testify because of the difficulty of traveling

from Hong Kong to San Francisco.

 Petitioner's contention that Mme. Koo's failure to testify

was attributable to the scheduling of the trial in these cases is

contrary to the record herein. While the Court did indicate during a telephonic conference with counsel for the parties prior to

the calendar call that it would attempt to schedule the trial in

these cases during the second week of its trial session in San

Francisco, it emphasized that it could not assure petitioner that

it could accommodate him by scheduling the trial during that

(continued...)

On brief, petitioner alleges, and asks us to infer from the

record, that Mme. Koo's age, the length of the journey from Hong

Kong, where she allegedly resided, to San Francisco, where, at

the request of petitioner, trial was held, and the scheduling of

the trial herein prevented her attendance at trial.46 When the
- 70 -

46(...continued)

week. The Court also indicated to the parties at the call of

these cases from the calendar and before scheduling the trial

that it might not be able to accommodate their scheduling preferences. When the Court asked the parties at the call of these

cases from the calendar to estimate trial time and name the witnesses they intended to call at trial, petitioner's counsel did

not name Mme. Koo as one of the witnesses he would call at trial

and did not ask the Court to schedule the trial to take place at

a time when she would be available. The only ground on which

petitioner's counsel sought at that time to delay the commencement of the trial was petitioner's absence from the calendar call

and his expected arrival in San Francisco the following night. 

The Court scheduled trial to begin on the first day of its trial

session in San Francisco because a witness named Mr. Catterton,

who was subpoenaed by petitioner only three business days prior

to the call of these cases from the calendar, was available to

testify only on that day and would not have been available again

until after the Court ended its trial session in San Francisco.

Court asked petitioner at the call of these cases from the calendar and before it had scheduled the time and date of the trial

herein to name the witnesses he intended to call at trial, he did

not include Mme. Koo among those witnesses and did not explain

that omission. Nor did petitioner ask the Court at that time

toconsider Mme. Koo's availability to testify in scheduling the

trial, object to the trial date set by the Court on the grounds

that Mme. Koo was not available at that time, or offer an explanation at trial for her absence. Petitioner's trial memorandum

that was submitted approximately two weeks before the call of

these cases from the calendar simply stated that Mme. Koo's ability to testify was "uncertain" due to her age and residence in

Hong Kong, not that those circumstances prevented her from testi-
- 71 -

47 Even if we were not to draw such an adverse inference, our

findings and holdings in these cases would not change.

48 The parties' stipulation of facts was received by the Court

at the call of these cases from the calendar on Oct. 25, 1993,

and was filed with the Court at the beginning of the trial later

that day. The Court did not rule on the evidentiary objections

stated in the stipulations because it did not have sufficient

time prior to trial to consider them or the parties' voluminous

stipulations and the exhibits attached thereto. That was because

of the time constraints placed on the Court attributable to other

Court business that had previously been scheduled to take place

on Oct. 25, 1993, and the need to schedule the trial in these

cases on that same day in order to accommodate a witness

subpoenaed by petitioner only three business days prior to the

first day of the trial session, see supra note 46.

fying. We conclude that Mme. Koo did not testify at trial because petitioner did not intend to call Mme. Koo as a witness,

rather than for any of the reasons advanced by petitioner on

brief.

Based on our review of the entire record in these cases, we

will draw an adverse inference from petitioner's failure to call

Mme. Koo as a witness.47 

B. Evidentiary Objections

We now deal with the admissibility of certain exhibits to

which the parties stipulated, but as to which one of the parties

preserved an evidentiary objection in their stipulations.48 At

trial, we admitted those exhibits into evidence conditionally,

subject to our ruling on their admissibility.

1. Petitioner's Income Tax Returns

Petitioner objected in the stipulations on grounds of

relevance to the admission of his individual Federal income tax
- 72 -

returns for 1984, 1985, and 1986. On brief, he does not restate

that objection or advance any argument relating to it. We

therefore presume that petitioner has abandoned his evidentiary

objection to the admission into evidence of his individual

Federal income tax returns for 1984, 1985, and 1986. See Rybak

v. Commissioner, 91 T.C. 524, 566 n.19 (1988). Consequently, we

unconditionally admit those returns into evidence and make them a

part of the record in these cases.

2. Certain Instruments of Transfer

and Stock Certificates 

Respondent objected in the stipulations on grounds of

hearsay to the admission of certain instruments of transfer with

respect to Traveluck, Double Wealth, and Forward, and certain

stock certificates with respect to Traveluck and Forward. On

brief, respondent restates those objections. 

To counter respondent's hearsay objections, petitioner

appears to argue that the documents in question are not excludible hearsay under rule 802 of the Federal Rules of Evidence

because he is not offering them for the truth of the matters

asserted therein, but to show that the persons signing those

documents believed that Mme. Koo was a shareholder of those

corporations.

Rule 801(c) of the Federal Rules of Evidence defines hearsay

as "a statement, other than one made by the declarant while

testifying at the trial or hearing, offered in evidence to prove
- 73 -

the truth of the matter asserted." Rule 801(a) of the Federal

Rules of Evidence defines a "statement" as "(1) an oral or

written assertion or (2) nonverbal conduct of a person, if it is

intended by the person as an assertion." The notes of the

Advisory Committee on the Federal Rules of Evidence discuss the

effect of the foregoing definitions as follows:

The effect of the definition of "statement" is to

exclude from the operation of the hearsay rule all

evidence of conduct, verbal or nonverbal, not intended

as an assertion. The key to the definition is that

nothing is an assertion unless intended to be one.

* * * nonverbal conduct * * * [not intended as an

assertion] may be offered as evidence that the person

acted as he did because of his belief in the existence

of the condition sought to be proved, from which belief

the existence of the condition may be inferred. * * *

[Notes of the Advisory Committee on the Federal Rules

of Evidence, 28 U.S.C. app. at 722 (1988).]

Assertions falling within the hearsay rule may be express or

implied. See United States v. Reynolds, 715 F.2d 99, 103 (3d

Cir. 1983). The Court of Appeals for the District of Columbia

Circuit has concluded that, whether an assertion is express or

implied, the critical distinction for purposes of deciding whether conduct constitutes a statement as defined in rule 801(a) of

the Federal Rules of Evidence is whether that conduct constitutes

an intentional or unintentional message with respect to the

matter sought to be proven. See United States v. Long, 905 F.2d

1572, 1580 (D.C. Cir. 1990). Where the conduct in question

constitutes an unintentional message, that conduct is not hearsay. See id.
- 74 -

The instrument of transfer with respect to Traveluck, dated

January 3, 1985, stated, inter alia, that Ms. Gaw was transferring the one share of the stock of Traveluck held in her name to

Mme. Koo, subject to the same conditions under which Ms. Gaw held

that share. There are two instruments of transfer with respect

to Double Wealth. In one such instrument, entitled "Transfer of

Subscription" and dated January 8, 1985, S.B. Goweh, inter alia,

(1) stated that he was transferring to Mme. Koo all his interest

as a subscriber to the stock of Double Wealth to the extent of

one share of the common stock of that corporation; (2) requested

Double Wealth to issue a certificate in her name for that one

share; and (3) directed Double Wealth to register that transfer

on its books, effective January 8, 1985. A second instrument of

transfer with respect to Double Wealth, dated June 5, 1988,

stated, inter alia, that Mme. Koo was transferring the one share

of the stock of that corporation held in her name to Pioneer,

subject to the same conditions under which Mme. Koo held that

share. In the instrument of transfer with respect to Forward,

entitled "Transfer of Subscription" and dated December 4, 1980,

S.B. Goweh, inter alia, (1) stated that he was transferring to

Mme. Koo all his interest as a subscriber to the stock of Forward

to the extent of one share of the common stock of that corporation; (2) requested Forward to issue a certificate in her name

for that one share; and (3) directed Forward to register that

transfer on its books, effective December 4, 1980.
- 75 -

49 We note that none of those instruments of transfer establishes whether or not Mme. Koo was the beneficial owner of the

one share of stock of the corporation to which each relates or

was holding such stock for some other person.

Based on the assertions in, and the nature of, the instruments of transfer with respect to Traveluck, Double Wealth, and

Forward, we conclude that the persons signing those documents

intended to assert expressly that one share of the stock of each

of those corporations was, or was to be, held in the name of Mme.

Koo.49 Accordingly, those documents fall within the definition

of hearsay in rule 801(c) of the Federal Rules of Evidence, and,

pursuant to rule 802 of those rules, we will not admit them into

evidence.

The respective stock certificates of Traveluck and of Forward to which respondent objected (1) certified that Mme. Koo was

the owner of one share of the stock of each of those corporations

and (2) further stated, inter alia, that each corporation had

caused its respective officers to sign the respective certificates in witness of that certification. Obviously, by having

signed the respective stock certificates as officers of Traveluck

and Forward, the persons signing those certificates intended to

assert that Mme. Koo owned one share of the stock of Traveluck

and Forward, respectively. Accordingly, those stock certificates

fall within the definition of hearsay in rule 801(c) of the

Federal Rules of Evidence, and, pursuant to rule 802 of those
- 76 -

50 Even if we were to conclude that the documents in question

were not hearsay as petitioner contends, we would not necessarily

admit them into evidence. This is because those documents appear

to be merely cumulative of evidence already in the record. See

Fed. R. Evid. 403. The parties stipulated that (1) one share of

the stock of Traveluck was held in the name of Mme. Koo at all

relevant periods after Jan. 3, 1985; (2) one share of the stock

of Double Wealth was held in the name of Mme. Koo from Jan. 8,

1985, through the remainder of the years at issue; and (3) one

share of the stock of Forward was issued in the name of Mme. Koo

in December 1980. The beliefs of the persons signing the instruments of transfer with respect to Traveluck, Double Wealth, and

Forward and the stock certificates of Traveluck and Forward

appear to add nothing to, and seem to be merely cumulative of,

those stipulations.

 Moreover, even if we were to admit the documents in question

into evidence, they would not necessarily establish who owned a

majority of the stock of, or who controlled, Traveluck, Double

Wealth, or Forward; nor would they change our resolution of the

issues in these cases. Each instrument of transfer purports to

effect the transfer to or by, or the issuance to, Mme. Koo of

only one share of stock in each of those corporations, and the

respective stock certificates purport to certify ownership by

Mme. Koo of only one share of stock in Traveluck and in Forward. 

No instrument of transfer indicated the number of issued and

outstanding shares of stock of the corporation to which it

relates. Although each stock certificate indicated the number of

authorized shares of stock of the corporation to which it relates, there is no evidence in the record concerning the total

number of authorized shares of stock of each corporation that was

issued and outstanding during the years at issue.

rules, we will not admit them into evidence.50

3. Horbury Financial Statement

Respondent objected in the stipulations on grounds of hearsay to the admission of Horbury's balance sheet and income statement for the year ended March 31, 1986. On brief, respondent

does not restate that objection or advance any argument relating

to it. We therefore presume that respondent has abandoned her

evidentiary objection to the admission into evidence of Horbury's
- 77 -

51 Contrary to the parties' stipulation that Exhibit 15-O is

Pioneer's annual report for the year ended Mar. 31, 1985, we find

that exhibit to be an incomplete copy of that annual report. At

a minimum, that exhibit lacks certain notes to the financial

statements of Pioneer and its subsidiaries that are referred to

therein.

52 We unconditionally admit Exhibit 15-O as an incomplete copy

(continued...)

balance sheet and income statement for the year ended March 31,

1986. See Rybak v. Commissioner, 91 T.C. at 566 n.19. Consequently, we unconditionally admit that document into evidence and

make it a part of the record in these cases.

4. Annual Reports of Pioneer and

Financial Statements of Multi-Credit

Respondent objected in the stipulations on grounds of hearsay to the admission of certain documents that purport to be

Pioneer's annual reports for the years ended March 31, 1983,

March 31, 1984, March 31, 1985,51 and March 31, 1986, and MultiCredit's financial statements for the years ended March 31, 1986,

and March 31, 1987. On brief, respondent does not restate those

objections or advance any argument relating to them. We therefore presume that respondent has abandoned her evidentiary objections to the admission into evidence of the documents that purport to be the annual reports of Pioneer and the financial

statements of Multi-Credit. See Rybak v. Commissioner, 91 T.C.

at 566 n.19. Consequently, we unconditionally admit those

documents into evidence and make them a part of the record in

these cases.52
- 78 -

52(...continued)

of Pioneer's annual report for the year ended Mar. 31, 1985.

53 The newspaper article included so-called "back-to-back loan

structures" in a list of "commercial activities often carried out

from a favorable tax jurisdiction". The term "back-to-back loan

structures" is contained in a table accompanying the newspaper

article that attributes the information contained in that table

to Price Waterhouse. 

5. June 12, 1987 Newspaper Article

Respondent objected in the stipulations on grounds of relevance and hearsay to the admission of an article (newspaper article) that appeared in the June 12, 1987 edition of the Financial

Times.53 On brief, respondent restates those objections. 

To counter respondent's relevancy objection, petitioner

appears to contend that the newspaper article is relevant to his

claims that respondent violated his constitutional right to equal

protection of the law and abused her discretion by relying on

Rev. Rul. 87-89, 1987-2 C.B. 195, situations (1) and (2), obsoleted for payments made after September 10, 1995, by Rev. Rul.

95-56, 1995-36 I.R.B. 20, in making the withholding tax determinations against Radcliffe and BOT that are at issue in these

cases. To counter respondent's hearsay objection, petitioner

argues that the Court should take judicial notice of the newspaper article as a legislative fact and that the article is

admissible under rules 803(17) and 803(24) of the Federal Rules

of Evidence.

Even assuming arguendo that the newspaper article were rele-
- 79 -

vant to petitioner's constitutional and abuse of discretion

claims, we disagree with petitioner that the Court should take

judicial notice of the newspaper article as a legislative fact or

that it is admissible as an exception to the hearsay rule under

rules 803(17) and 803(24) of the Federal Rules of Evidence.

 With respect to petitioner's argument that the Court should

take judicial notice of the newspaper article as a legislative

fact, legislative facts generally are those pertinent to legal

reasoning that assist a court in deciding questions of law,

policy, and discretion. See Nolan v. Ramsey, 597 F.2d 577, 580-

581 n.2 (5th Cir. 1979); see also Notes of the Advisory Committee

on the Federal Rules of Evidence, 28 U.S.C. app. at 738 (1988); 1

Weinstein & Berger, Weinstein's Evidence, par. 200[03], at 200-16

to 200-17 (1995). We do not find the newspaper article to be

pertinent to the legal reasoning involved in, or otherwise of

assistance to the Court's resolution of, the claims to which

petitioner contends that article is relevant. Accordingly, we

will not admit the newspaper article as a legislative fact.

With respect to petitioner's reliance on rules 803(17) and

803(24) of the Federal Rules of Evidence, we note at the outset

that the statement appearing in the newspaper article concerning

"back-to-back loan structures" was attributed by that article to

Price Waterhouse. Consequently, there are two layers of hearsay

that we face, viz., the statement made by Price Waterhouse to the

declarant in the newspaper article and that declarant's statement
- 80 -

in the newspaper article. Each layer of hearsay must be independently admissible. Fed. R. Evid. 805. Petitioner has not

attempted to show that the statement made by Price Waterhouse to

the declarant in the newspaper article is within any exception to

the hearsay rule.

Turning to the newspaper article itself, rule 803(17) of the

Federal Rules of Evidence on which petitioner relies applies to

market quotations or other published compilations generally used

or relied upon by the public or persons in particular occupations. Petitioner has not shown that the newspaper article is

the type of compilation contemplated by rule 803(17) of the

Federal Rules of Evidence or that it was relied upon by the

public or persons in particular occupations. We therefore will

not admit the newspaper article under that rule.

Rule 803(24) of the Federal Rules of Evidence, one of the

residual exceptions to the hearsay rule on which petitioner also

relies, allows admission of a statement not expressly within any

of the other exceptions to the hearsay rule if:

 1. The statement has "circumstantial guarantees of

trustworthiness" equivalent to the enumerated hearsay

exceptions of * * * [rule 803 of the Federal Rules of

Evidence];

 2. the statement is offered as evidence of a material fact;

 3. the statement is more probative on the point for

which it is offered than any other evidence which the

proponent can procure through reasonable efforts;

 4. the general purposes of the rules of evidence and
- 81 -

54 Fed. R. Evid. 803(24) also requires the proponent of the

statement to furnish the opposing party with the particulars of

the statement, including the name and address of the declarant.

55 During a deposition of Henry Yung, an officer of Union Bank,

that was taken by petitioner approximately two weeks prior to the

trial of these cases, petitioner learned that Mr. Yung was not

able to testify that "back-to-back loan structures" were popular

when Rev. Rul. 87-89, 1987-2 C.B. 195, situations (1) and (2),

obsoleted for payments made after Sept. 10, 1995, by Rev. Rul.

95-56, 1995-36 I.R.B. 20, was issued. At about the same time,

petitioner subpoenaed Thomas D. Fuller, an individual who petitioner believed was employed by the Internal Revenue Service

(Service) and was able to testify that such arrangements had been

popular when that ruling was issued. Petitioner learned approximately five days prior to trial that Mr. Fuller had left the

employ of the Service and was abroad. At the call of these cases

from the calendar, petitioner attempted to offer the testimony of

a witness not listed in his trial memorandum with respect to the

popularity of "back-to-back loan structures", which the Court did

(continued...)

the interest of justice will [best] be served by admission of the statement into evidence; and 

 5. the proponent of the statement has made it known

to the adverse party sufficiently in advance of trial

or hearing to provide the adverse party with a fair

opportunity to prepare to meet it.[54] [Goldsmith v.

Commissioner, 86 T.C. 1134, 1139 (1986); fn. ref.

omitted.]

The foregoing residual exception to the hearsay rule is to be

"used very rarely and only in exceptional circumstances" to

ensure that it does not emasculate the body of law underlying the

rules of evidence. Id. at 1140.

Petitioner argues on brief that the admission of the newspaper article is justified because of petitioner's inability to

obtain other evidence showing how common "back-to-back loan

structures" were when Rev. Rul. 87-89, supra, was issued55 and
- 82 -

55(...continued)

not allow because of potential prejudice to respondent.

because petitioner cited that article in his trial memorandum and

furnished a copy to respondent approximately two weeks prior to

the trial of these cases. Even assuming arguendo that petitioner

were to satisfy the third and fifth conditions (set forth above)

which are imposed by rule 803(24) of the Federal Rules of Evidence and to which petitioner's argument is addressed, he has not

attempted to show that the other conditions for admissibility of

the newspaper article that are imposed by rule 803(24) of the

Federal Rules of Evidence are satisfied.

For example, we are not persuaded that the newspaper article

possesses circumstantial guarantees of trustworthiness equivalent

to other classes of hearsay governed by rule 803 of the Federal

Rules of Evidence. The statement in that article concerning

"back-to-back loan structures" seems to be nothing more than a

repetition of what the declarant in the newspaper article was

told by Price Waterhouse, which clearly is hearsay, and the mere

fact of its publication in a newspaper is not in itself sufficient to establish its trustworthiness. Cf. Meschino v. North

American Drager, Inc., 841 F.2d 429, 434 (1st Cir. 1988). Because we find that the newspaper article does not possess circumstantial guarantees of trustworthiness equivalent to other

classes of admissible hearsay, we need not consider the other

requirements of rule 803(24) of the Federal Rules of Evidence. 
- 83 -

56 Even if we were to admit the newspaper article into evidence,

it would not change our resolution of petitioner's constitutional

and abuse of discretion claims in these cases.

57 The August 1987 memorandum stated in relevant part that Rev.

Rul. 87-89, supra, provides guidance with respect to "currently

popular international financing structures."

On the instant record, we conclude that the newspaper article is

not admissible under that rule.56 

6. August 28, 1987 Memorandum

Respondent objected in the stipulations on grounds of relevance and hearsay to the admission of a memorandum dated August

28, 1987 (August 1987 memorandum), from Thomas D. Fuller, then

Special Assistant to the Associate Chief Counsel (International),

to the Director of Public Affairs that accompanied copies of Rev.

Rul. 87-89, 1987-2 C.B. 195, for release under the Service's

advance revenue ruling procedures. On brief, respondent restates

those objections.57

To counter respondent's relevancy objection, petitioner

appears to contend that the August 1987 memorandum is relevant to

petitioner's constitutional and abuse of discretion claims. To

counter respondent's hearsay objection, petitioner argues that

that memorandum is admissible under rules 803(8) and 803(24) of

the Federal Rules of Evidence to show that the form of financing

analyzed in Rev. Rul. 87-89, supra, was popular at the time the

ruling was issued and under rules 801 and 803(3) of the Federal

Rules of Evidence to show that the Service's National Office
- 84 -

(National Office) was aware that it was popular at that time.

Even assuming arguendo that the August 1987 memorandum were

relevant to petitioner's constitutional and abuse of discretion

claims, we disagree with petitioner that that memorandum is

admissible for the purposes for which he has offered it under any

of the exceptions to the hearsay rule upon which he relies.

We consider first whether the August 1987 memorandum is

admissible under rules 803(8) and 803(24) of the Federal Rules of

Evidence to show that the pattern of financing described in Rev.

Rul. 87-89, supra, was popular at the time that ruling was issued. We conclude that the August 1987 memorandum is not admissible under rule 803(8) of the Federal Rules of Evidence. That

rule permits introduction of statements of public agencies setting forth, inter alia, matters observed pursuant to a duty

imposed by law as to which there was a duty to report or factual

findings resulting from an investigation made pursuant to authority granted by law. Petitioner has made no showing that the

statements in the August 1987 memorandum were recorded pursuant

to a duty to report or that they are factual findings from an

investigation made pursuant to legal authority.

Petitioner argues in a conclusory manner on brief that the

conditions for admissibility imposed by rule 803(24) of the

Federal Rules of Evidence are satisfied. As was true of his

evidentiary arguments relating to the newspaper article, petitioner contends on brief that the admission of the August 1987
- 85 -

memorandum is justified because of petitioner's inability to

obtain other evidence showing how common "back-to-back

loanstructures" were when Rev. Rul. 87-89, supra, was issued and

because petitioner cited that memorandum in his trial memorandum

and advised respondent approximately one month prior to the trial

of these cases that he would ask the Court to take judicial

notice of that memorandum. Even assuming arguendo that petitioner were to satisfy the third and fifth conditions (set forth

above) that are imposed by rule 803(24) of the Federal Rules of

Evidence and to which petitioner's contentions are addressed, he

has not attempted to establish that the other conditions for

admissibility of the August 1987 memorandum that are imposed by

rule 803(24) of the Federal Rules of Evidence are satisfied.

For example, petitioner has not attempted to establish that

the August 1987 memorandum possesses circumstantial guarantees of

trustworthiness equivalent to other classes of hearsay governed

by rule 803 of the Federal Rules of Evidence, such as those of

rule 803(8), on which petitioner also relies. Nor has petitioner

attempted to show the knowledge and qualifications of the declarant (i.e., the author of the August 1987 memorandum), factors to

be considered in evaluating the trustworthiness of a statement. 

See Herdman v. Smith, 707 F.2d 839, 841 (5th Cir. 1983). On the

instant record, we do not consider the August 1987 memorandum

admissible under rule 803(24) of the Federal Rules of Evidence. 
- 86 -

58 Even if we were to admit that memorandum for that purpose, it

would not change our resolution of petitioner's constitutional

and abuse of discretion claims in these cases.

We will not admit the August 1987 memorandum into evidence

under rule 803(8) or 803(24) of the Federal Rules of Evidence for

the purpose of showing that the pattern of financing described in

Rev. Rul. 87-89, supra, was popular at the time that ruling was

issued.58 

We now consider petitioner's contention that the August 1987

memorandum is admissible to show that the National Office was

aware that the pattern of financing described in Rev. Rul. 87-89,

supra, was popular at the time that ruling was issued. As we

understand petitioner's argument, that memorandum is not excludible hearsay under rule 802 of the Federal Rules of Evidence

because either (1) it is not hearsay as defined by rule 801(c) of

those rules in that it is offered to show circumstantially the

National Office's state of mind, and not for the truth of the

matter asserted therein, or (2) it is admissible under rule

803(3) of those rules that provides an exception to the hearsay

rule for:

A statement of the declarant's then existing state of

mind, emotion, sensation, or physical condition (such

as intent, plan, motive, design, mental feeling, pain,

and bodily health), but not including a statement of

memory or belief to prove the fact remembered or believed unless it relates to the execution, revocation,

identification, or terms of declarant's will.

Petitioner is not seeking to admit the August 1987 memorandum
- 87 -

59 Even if we were to admit the August 1987 memorandum into

evidence for the purposes advocated by petitioner, it would not

change our resolution of petitioner's constitutional and abuse of

(continued...)

under the foregoing hearsay exception in order to show that the

financing structures described in Rev. Rul. 87-89, 1987-2 C.B.

195, in fact were "currently popular" at the time the ruling was

issued. Instead, petitioner asserts that that document is admissible to show that the National Office was aware that those

financing structures were "currently popular" at that time.

On its face, the August 1987 memorandum seems to represent

only the views or state of mind of its author. Petitioner has

not shown that that memorandum is a statement of the institutional view or position of the National Office or that its author was

in a position that enabled or entitled him to articulate the view

or position of the National Office with respect to the current

popularity of the financing structures described in Rev. Rul. 87-

89, supra. Petitioner has not established the basis on which we

may impute to the National Office the state of mind of the author

of the August 1987 memorandum. That memorandum reflects only its

author's state of mind with respect to the popularity of the

pattern of financing analyzed in Rev. Rul. 87-89, supra, regardless whether that state of mind was correct. On the instant

record, we conclude that the August 1987 memorandum is not admissible to show the state of mind of the National Office.59
- 88 -

59(...continued)

discretion claims in these cases.

60 Paragraph 152 of the stipulations provides:

After making reasonable inquiry of the Office of Associate Chief Counsel (International), the Office of

the Assistant Commissioner (International), the Office of Western

Regional Counsel, and the San Francisco District Office, respondent has not discovered any unagreed case in the Examination

Division or docketed case other than these cases and the case of

Fu Investment Company v. Commissioner, Docket No. 13306-92, in

which Rev. Rul. 87-89 has been applied retroactively. * * *

 7. Paragraph 152 of the Stipulation of Facts

Respondent objected in the stipulations on grounds of relevance to the admission of paragraph 152 of the parties' stipulation of facts.60 On brief, respondent restates that objection.

We conclude that paragraph 152 of the stipulations is relevant to petitioner's constitutional and abuse of discretion

claims. Consequently, we unconditionally admit that paragraph of

the stipulations into evidence and make it a part of the record

in these cases.

C. Respondent's Motion To Compel

Production of Documents 

Petitioner contends that the Court erred in granting respondent's motion to compel production of certain documents (motion

to compel) that respondent had sought to discover under Rule 72. 

In response to that motion, petitioner denied having possession,

custody, or control of those documents. He argues that his

denial was sufficient to prevent the Court from granting respondent's motion to compel and that the Court erroneously placed on
- 89 -

61 In 1970, Fed. R. Civ. P. 34 was amended to eliminate the requirement that a party show "good cause" (e.g., a showing that

the party from whom discovery was sought had possession, control,

or custody of the documents requested) in order to obtain discovery of documents. See 4A Moore's Federal Practice, par.

34.08[2], at 34-43 to 34-44 (2d ed. 1994); 8A Wright & Miller,

Federal Practice and Procedure, par. 2210, at 396-397 (2d ed.

1994); see also Norman v. Young, 422 F.2d 470, 472-473 (10th Cir.

1970) (describing requirements imposed on party seeking discovery

under Fed. R. Civ. P. 34 prior to its amendment in 1970). Rule

72 is derived from Fed. R. Civ. P. 34 as amended in 1970. Rule

72, like Fed. R. Civ. P. 34 as amended in 1970, requires no showing of good cause by the party requesting discovery as a prereq-

(continued...)

him the burden of showing that he lacked possession, custody, or

control of the documents in question. Petitioner contends that

it was respondent's burden to establish those circumstances in

order to prevail on her motion to compel.

Petitioner is incorrect in contending that respondent bore

the burden of demonstrating that he had possession, custody, or

control of the documents with respect to which the Court granted

respondent's motion to compel. The burden is on the party objecting to show that that party's objections to a request for

production of documents should be sustained by the Court. See

Branerton Corp. v. Commissioner, 64 T.C. 191, 193 (1975); see

also 4A Moore's Federal Practice, par. 34.05[3], at 34-36 (2d ed.

1994) (on motion to compel production under rule 34 of Federal

Rules of Civil Procedure, from which Rule 72 is derived, see

Rosenfeld v. Commissioner, 82 T.C. 105, 120 (1984), the party

objecting to discovery must show that production should not be

ordered).61 A claim that a party is not in possession, custody,
- 90 -

61(...continued)

uisite to the production of documents. See Morris v. Commissioner, 65 T.C. 324, 325-326 (1975).

 The Federal Rules of Civil Procedure now expressly impose on

the party requesting discovery the burden of showing that requested materials are discoverable only with respect to trial

preparation materials described in Fed. R. Civ. P. 26(b)(3) and

(b)(4). Those materials generally consist of documents and tangible things prepared in anticipation of litigation and facts

known to and opinions of experts not expected to be called at

trial.

 The present law regarding the burden of proof with respect to

requests for discovery of documents under the Federal Rules of

Civil Procedure may be summarized as follows:

[The good cause] requirement was dropped in 1970, leaving the initiative with the party from whom documents

are sought to object, or apply to the court for a protective order under * * * [Fed. R. Civ. P.] 26(c), and

to show good cause why the documents should not be produced. Thus, the burden of making a showing rests on

the party seeking discovery only if seeking documents

or tangible things "prepared in anticipation of litigation or for trial." * * * [4 Moore's Federal Practice,

par. 26.15[2], at 26-294 (2d ed. 1994); fn. ref. omitted.]

or control of documents constitutes an objection to the production of documents. See Henderson v. Zurn Indus., Inc., 131

F.R.D. 560, 567 (S.D. Ind. 1990) (construing analogous provision

of Federal Rules of Civil Procedure).

In telephonic conference calls and written filings with the

Court after respondent filed her motion to compel, petitioner's

counsel described efforts being made to produce the documents

that were the subject of that motion and claimed that certain

documents could not be produced. The Court was not satisfied

that petitioner had demonstrated that he did not have possession,

custody, or control of the documents sought by respondent that he
- 91 -

62 The evidentiary hearing was held on Oct. 27, 1993, during the

trial of these cases because petitioner, without good cause, did

not make himself available to the Court at the call of these

cases from the calendar and did not present himself in Court

until Oct. 27, 1993, two days after the trial of these cases had

commenced. Despite petitioner's unjustified absence, the Court

delayed holding that hearing in an effort to accommodate him and

interrupted the trial in order to hold it.

did not produce. Consequently, the Court ordered an evidentiary

hearing concerning those documents that took place on October 27,

1993, during the trial of these cases.62

Both prior to and at the conclusion of that hearing, the

Court informed petitioner that he had the burden of proving that

he did not have possession, custody, or control of the documents

in question. At the evidentiary hearing, petitioner produced

certain documents sought by respondent, and respondent was satisfied with respect to all her requests except for certain records

of (1) Double Wealth with respect to BB Loan No. 3, (2) Horbury

with respect to, inter alia, the loan at issue involving Horbury,

and (3) Forward with respect to, inter alia, the ownership of its

stock during the years 1983 through 1986 and its alleged pledges

of cash deposits to secure loans to Radcliffe and BOT during the

years 1982 through 1986. At the evidentiary hearing on respondent's motion to compel, petitioner testified that he did not

have possession, custody, or control of the documents in question

that had not been produced and about his alleged efforts to

locate them.

On October 27, 1993, at the conclusion of the hearing on

respondent's motion to compel, the Court orally ruled that peti-
- 92 -

tioner had not carried his burden of proving that he did not have

possession, custody, or control of the documents that had been

requested by respondent and that had not been produced by him and

that, therefore, respondent's motion to compel was granted in

that those documents must be produced by petitioner. In so

ruling, the Court found petitioner's testimony at that evidentiary hearing to be contradictory, vague, evasive, nonresponsive,

and not credible in certain respects. The Court therefore granted respondent's motion to compel. In the Court's written order,

dated October 27, 1993, confirming its oral ruling granting respondent's motion to compel, the Court restated those findings

and conclusions. After considering petitioner's arguments on

brief, we remain persuaded that petitioner failed to show why he

should not have been compelled to produce the documents in question, and we reaffirm our granting of respondent's motion to

compel. See Rosenfeld v. Commissioner, supra at 117.

After the Court orally ruled on respondent's motion to

compel, respondent apparently assumed that the Court intended to

impose a sanction on petitioner and inquired whether that sanction was that petitioner was not to be allowed to elicit testimony relating to the documents that the Court ordered him to

produce. The Court indicated that it was not imposing any sanction at that time. During petitioner's testimony at the trial of

these cases, which resumed after the hearing on respondent's motion to compel, respondent requested the Court not to allow petitioner to testify with respect to the BB Loan No. 3 transaction
- 93 -

as a sanction for his failure to produce records of Double Wealth

concerning that loan. The Court permitted petitioner to testify

about the BB Loan No. 3 transaction, indicating that it would

give that testimony whatever weight it considered appropriate.

On brief, respondent renews her request that we exclude

petitioner's testimony concerning the BB Loan No. 3 transaction. 

She also asks the Court to exclude petitioner's testimony relating to certain records of Horbury and of Forward that the Court

ordered petitioner to produce. Petitioner counters that the

sanctions sought by respondent are inappropriate because petitioner did not have an opportunity to comply with the Court's

order granting respondent's motion to compel, which was made on

the same day on which the trial of these cases concluded.

Based on our consideration of all of the circumstances

surrounding respondent's motion to compel and her request at

trial and on brief for sanctions, including the simultaneity of

the Court's granting that motion and the trial of these cases, we

will not impose sanctions on petitioner. 

II. General Principles Applicable to These Cases

Before turning to the specific questions that we must resolve in order to decide whether to sustain respondent's determinations against Radcliffe and BOT, and therefore whether to

sustain respondent's determinations of petitioner's transferee

liability, we set forth the basic legal framework within which we

must consider those questions.
- 94 -

63 A "foreign corporation" is a corporation that is not organized in the United States or under the law of the United States

or of any State. Sec. 7701(a)(4) and (5).

64 Income effectively connected with the conduct of a trade or

business within the United States that is included in the recipient's gross income under sec. 882(a)(2) is not subject to

withholding. Secs. 1442(a), 1441(c).

A. Taxation of Interest Received by 

Foreign Corporations--In General

Except as provided in section 881(c), section 881(a) imposes

a tax of 30 percent on, inter alia, amounts received as interest

from sources within the United States by a foreign corporation63

to the extent the interest received is not effectively connected

with the conduct of a trade or business within the United States

(noneffectively connected interest). Section 1442(a) generally

requires the payor of interest subject to the tax imposed by

section 881(a) to deduct and withhold that tax at the source.64

 Respondent contends, and petitioner does not dispute, that

during the years at issue the interest in question that was

received from Radcliffe and BOT was from sources within the

United States. See sec. 861(a)(1); sec. 1.861-2(a)(1) and (2),

Income Tax Regs. Nor does petitioner dispute respondent's position that during the years at issue the foreign corporations that

are treated as having received interest from Radcliffe and/or BOT

under respondent's theory of these cases (viz., Intercontinental,

Traveluck, Double Wealth, Merit, Pempire, Forward, Pioneer,

Multi-Credit, Mandalay, and Horbury) were not engaged in any
- 95 -

trade or business within the United States. The parties therefore agree on brief that in the event we were to sustain respondent's theory that the interest that was, in form, paid to

Bangkok Bank LA branch and Union Bank by Radcliffe and/or BOT

was, in substance, paid to those foreign corporations, that

interest would satisfy the general rules for taxation under

section 881(a) and withholding under section 1442(a) (unless the

portfolio interest exemption under section 881(c)(1) were applicable) in that it was from sources, and was not effectively

connected with the conduct of a trade or business, within the

United States. The parties also agree on brief that in the event

we were to sustain respondent's theory that the interest that

was, in form, paid to Horbury by BOT in 1984 does not qualify for

exemption from U.S. tax under the United States-Netherlands

income tax treaty in effect for that year, Convention With Respect to Taxes, Apr. 29, 1948, U.S.-Neth., art. VIII(1), 62 Stat.

1757, 1761, modified by Supplementary Convention, Dec. 30, 1965,

art. VI, 17 U.S.T. 896, 901 (U.S.-Netherlands treaty), that

interest would satisfy the general rules for taxation under

section 881(a) and withholding under section 1442(a) (unless the

portfolio interest exemption under section 881(c)(1) were applicable).

Hereinafter, (1) Intercontinental, Traveluck, Double Wealth,

Merit, Pempire, Forward, Pioneer, Multi-Credit, and Mandalay will

be referred to collectively as the foreign corporations pledging
- 96 -

65 The tax imposed by sec. 881(a) may also be reduced or eliminated by treaty. Sec. 894(a).

collateral, (2) the Los Angeles and Hong Kong branches of Bangkok

Bank Ltd. and Union Bank and its affiliates Standard Chartered

Bank HK and Standard Chartered Bank, Singapore, will be referred

to collectively as the banks in question, (3) Bangkok Bank LA

branch and Union Bank will be referred to collectively as the

U.S. banks in question, (4) the loans at issue that were, in

form, from the U.S. banks in question to Radcliffe and/or BOT

will be referred to collectively as the Bank loans, (5) the

transactions at issue involving the Bank loans will be referred

to collectively as the Bank transactions, (6) the loan at issue

that was, in form, from Horbury to BOT will be referred to as the

Horbury loan, and (7) the transaction at issue involving the

Horbury loan will be referred to as the Horbury transaction.

Certain exemptions from the tax imposed by section 881(a) on

noneffectively connected interest are provided by the Code, and

we now describe those relevant to these cases.65 As pertinent

here, section 861(a)(1)(A) exempts from that tax noneffectively

connected interest received by a foreign corporation on a deposit

with a person resident in the United States that is carrying on

the banking business by treating that interest as not arising

from sources within the United States.

Section 881(c)(1) generally exempts from the tax imposed by

section 881(a)(1) portfolio interest received by a foreign cor-
- 97 -

66 Sec. 881(c) was added by the Deficit Reduction Act of 1984

(1984 Act), Pub. L. 98-369, sec. 127(b)(1), 98 Stat. 650-651, and

generally applies to portfolio interest received after July 18,

1984, the date of the enactment of the 1984 Act, with respect to

obligations issued after that date in taxable years ending after

that date. Deficit Reduction Act of 1984, Pub. L. 98-369, sec.

127(g)(1), 98 Stat. 652.

67 The General Explanation of the Tax Reform Act of 1984 notes:

Congress did not believe it appropriate to repeal

the 30-percent tax for interest paid to related foreign

* * * [persons], because the combination of [a] U.S.

deduction [for that interest] and non-inclusion [of

that interest in U.S. taxable income] would create an

incentive for interest payments that Congress did not

intend. * * * [Staff of Joint Comm. on Taxation,

General Explanation of the Revenue Provisions of the

Deficit Reduction Act of 1984 at 393-394 (J. Comm.

Print 1984).]

68 The attribution rules of sec. 318(a), with certain modifications, are used to determine stock ownership for purposes of determining whether a recipient of interest is a 10-percent foreign

shareholder of the payor corporation. Secs. 881(c)(3)(B),

871(h)(3).

poration from sources within the United States.66 "Portfolio

interest" is defined as any interest (including original issue

discount) that would be subject to tax under section 881(a) but

for section 881(c) and that is paid on certain unregistered or

registered obligations. Sec. 881(c)(2). Portfolio interest does

not, however, include interest received by certain types of

foreign corporations.67 Specifically, portfolio interest does

not include, inter alia, interest received by a 10-percent foreign shareholder of the payor corporation.68 Sec. 881(c)(3)(B). 

Nor does portfolio interest include interest received by a controlled foreign corporation (CFC), as defined in section 957(a),
- 98 -

69 Sec. 881(c)(4) prescribes certain rules in the case of portfolio interest received by a CFC.

70 We note that the U.S. Court of Appeals for the Ninth Circuit

has described a "back-to-back loan" as "a bank loan * * * collateralized with a cash deposit from a third party." Erhard v.

Commissioner, 46 F.3d 1470, 1473 n.2 (9th Cir. 1995), affg. T.C.

Memo. 1992-376 and T.C. Memo. 1991-290.

from a related person, as defined in section 864(d)(4).69 Sec.

881(c)(3)(C).

In connection with the 10-percent foreign shareholder rule,

the conference report for the Deficit Reduction Act of 1984

stated:

taxpayers may attempt to circumvent the foreign shareholder * * * rule * * * by entering into "back to back"

loans, wherein a foreign affiliate of a U.S. taxpayer *

* * lends money to an unrelated foreign party that

relends that money at discount to the U.S. taxpayer.[70] The conferees intend that the Internal Revenue

Service, when appropriate, use means at its disposal to

determine whether back to back loans exist. [H. Conf.

Rept. 98-861 at 937-938, 1984-3 C.B. (Vol. 2) 191-192.]

In connection with the enactment of the exemption from U.S.

taxation for portfolio interest, Congress provided that interest

paid on a "United States affiliate obligation" to an "applicable

CFC" in existence on or before June 22, 1984, is to be treated as

paid to a resident of such CFC's country of incorporation. See

Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 127(g)(3), 98

Stat. 652-653; see also H. Conf. Rept. 98-861 at 938, 1984-3 C.B.

(Vol. 2) 192. A "United States affiliate obligation" is an

obligation issued before June 22, 1984, by a U.S. person related

to an applicable CFC within the meaning of section 482. Deficit
- 99 -

71 In 1993, Congress enacted sec. 7701(l). That provision authorizes the Secretary to prescribe regulations recharacterizing

multiple-party financing transactions where the Secretary determines that such recharacterization is appropriate to prevent tax

avoidance. Omnibus Budget Reconciliation Act of 1993, Pub. L.

103-66, sec. 13238, 107 Stat. 508-509. By enacting sec. 7701(l)

in 1993, Congress did not intend any negative inference to be

drawn concerning positions taken by respondent under preexisting

law. S. Prt. 103-36 at 191 (Comm. Print 1993); H. Rept. 103-111

at 729 (1993), 1993-3 C.B. 167, 305. Sec. 7701(l) took effect on

Aug. 10, 1993. See 107 Stat. 685; H. Conf. Rept. No. 103-213 at

655 (1993), 1993-3 C.B. 393, 533. On Aug. 11, 1995, final

regulations were issued under sec. 7701(l). T.D. 8611, 60 Fed.

Reg. 40997 (Aug. 11, 1995). As pertinent here, those regulations

apply to payments by financed entities, as defined in sec. 1.881-

3(a)(2)(i), Income Tax Regs., made on or after Sept. 11, 1995,

but do not apply to interest payments covered by sec. 127(g)(3)

of the Deficit Reduction Act of 1984, 98 Stat. 652-653, or to

interest payments with respect to other debt obligations issued

prior to Oct. 15, 1984 (whether or not such debt was issued by a

Netherlands Antilles corporation). Sec. 1.881-3(f), Income Tax

Regs.

Reduction Act of 1984, Pub. L. 98-369, sec. 127(g)(3)(C)(ii), 98

Stat. 653. An "applicable CFC" is, in general, a CFC that maintains a debt-to-equity ratio of not more than five to one and the

principal activity of which is the issuing of obligations to

foreign persons or the holding of short term obligations and the

lending of the proceeds of such obligations to U.S. persons

related to it within the meaning of section 482. See Deficit

Reduction Act of 1984, Pub. L. 98-369, sec. 127(g)(3)(C)(ii), 98

Stat. 653.

B. Substance Over Form and Related Doctrines

Because the parties argue these cases essentially in terms

of substance over form and related (e.g. step transaction and

sham) doctrines, we briefly describe those principles.71
- 100 -

Under the substance over form doctrine, although the form of

a transaction may literally comply with the provisions of the

Code, that form will not be given effect where it has no business

purpose and operates simply as a device to conceal the true

character of that transaction. See Gregory v. Helvering, 293

U.S. 465, 469-470 (1935). "To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to

alter tax liabilities, would seriously impair the effective

administration of the tax policies of Congress." Commissioner v.

Court Holding Co., 324 U.S. 331, 334 (1945). If, however, the

substance of a transaction accords with its form, that form will

be upheld and given effect for Federal tax purposes. See

Blueberry Land Co. v. Commissioner, 361 F.2d 93, 100-101 (5th

Cir. 1966), affg. 42 T.C. 1137 (1964).

The step transaction doctrine developed from the substance

over form doctrine. See Associated Wholesale Grocers, Inc. v.

United States, 927 F.2d 1517, 1521 (10th Cir. 1991). We have

considered step transaction principles on many occasions. Those

principles can be summarized by restating what we said about them

in Penrod v. Commissioner, 88 T.C. 1415, 1428-1430 (1987):

The step transaction doctrine is in effect another rule

of substance over form; it treats a series of formally

separate "steps" as a single transaction if such steps

are in substance integrated, interdependent, and focused toward a particular result. * * * There is no

universally accepted test as to when and how the step

transaction doctrine should be applied to a given set

of facts. Courts have applied three alternative tests

in deciding whether to invoke the step transaction

doctrine in a particular situation.
- 101 -

The narrowest alternative is the "binding commitment" test, under which a series of transactions are

collapsed if, at the time the first step is entered

into, there was a binding commitment to undertake the

later step. See Commissioner v. Gordon, 391 U.S. 83,

96 (1968); * * *

At the other extreme, the most far-reaching alternative is the "end result" test. Under this test, the

step transaction doctrine will be invoked if it appears

that a series of formally separate steps are really

prearranged parts of a single transaction intended from

the outset to reach the ultimate result. See King

Enters., Inc. v. United States, 418 F.2d at 516; * * * 

The third test is the "interdependence" test,

which focuses on whether "the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of

the series." Redding v. Commissioner, 630 F.2d at

1177; * * * 

Steps that are transitory, meaningless, or lacking in a nontax, business purpose may be disregarded for purposes of determining the true nature of a transaction. See Minnesota Tea Co.

v. Helvering, 302 U.S. 609, 613 (1938). 

A transaction may be treated as a sham where a taxpayer is

motivated by no business purpose other than obtaining tax benefits and the transaction has no economic substance because no

reasonable possibility of profit exists. See Rice's Toyota

World, Inc. v. Commissioner, 752 F.2d 89, 91-95 (4th Cir. 1985),

affg. on this issue 81 T.C. 184 (1983). Even if a transaction is

not a sham, it may still be recast in order to reflect its true

nature. See Packard v. Commissioner, 85 T.C. 397, 419-422

(1985).

Interposition of an intermediary between other persons involved in a transaction may be disregarded under substance over
- 102 -

form and related principles. See Commissioner v. Court Holding

Co., supra; Reef Corp. v. Commissioner, 368 F.2d 125, 129-130

(5th Cir. 1966), affg. in part, revg. in part on another issue

T.C. Memo. 1965-72. If a person involved in a transaction functions as a conduit or intermediary between the other persons involved in that transaction, that is to say, where the actual obligation, whether legal or otherwise, runs between those other

persons, such person will be treated as such for Federal tax purposes. See Esmark, Inc. & Affiliated Cos. v. Commissioner, 90

T.C. 171, 194 (1988), affd. without published opinion 886 F.2d

1318 (7th Cir. 1989); see also Aiken Indus., Inc. v. Commissioner, 56 T.C. 925, 934 (1971). Even if a person involved in a

transaction is otherwise engaged in business and is not controlled by any of the other persons involved in that transaction,

the role of that person in the transaction may nonetheless be

ignored or recharacterized. See Koehring Co. v. United States,

583 F.2d 313, 320 (7th Cir. 1978); Burns v. Commissioner, 78 T.C.

185, 212-213 (1982); Estate of Weiskopf v. Commissioner, 64 T.C.

78, 93-98 (1975), affd. without published opinion 538 F.2d 317

(2d Cir. 1976); Bank of Am. Natl. Trust & Sav. Association v.

Commissioner, 15 T.C. 544, 552-553 (1950), affd. per curiam 193

F.2d 178 (9th Cir. 1951).

A very important consideration in applying substance over

form and related principles relates to the presence or the absence of a nontax, business purpose for the form of a transac-
- 103 -

tion. See, e.g., Packard v. Commissioner, supra. However, an

intention to minimize taxes, standing alone, does not require

that the form of a transaction be disregarded. See, e.g., McLane

v. Commissioner, 46 T.C. 140, 145 (1966), affd. per curiam 377

F.2d 557 (9th Cir. 1967). 

 Substance over form and related doctrines all require "a

searching analysis of the facts to see whether the true

substanceof the transaction is different from its form or whether

the form reflects what actually happened." Harris v. Commissioner, 61 T.C. 770, 783 (1974). The issue of whether any of

those doctrines should be applied involves an intensely factual

inquiry. See Gordon v. Commissioner, 85 T.C. 309, 327 (1985);

see also Bowen v. Commissioner, 78 T.C. 55, 79 (1982). In this

regard, we note that the issues presented in the instant cases

turn on the particular facts and circumstances established by the

record herein, and we do not intend to, and do not, provide

herein any resolution of the proper tax treatment of transactions

that may appear to be similar to those presented in these cases.

In deciding whether to apply substance over form and related

principles to the transactions at issue, we examine the relationships among the persons involved in those transactions because

those relationships are factors that we may consider in deciding

whether those transactions should be ignored or recharacterized. 

See Wrenn v. Commissioner, 67 T.C. 576, 584 (1976); Aiken Indus.,

Inc. v. Commissioner, 56 T.C. at 934. However, those transac-
- 104 -

72 We set forth what we understand to be the main arguments and

contentions that the parties advance in support of their respective positions.

73 Although the parties' respective positions and the contentions supporting those positions are discussed by them principally in terms of the U.S. banks in question, in addressing those

positions and contentions we have considered all of the banks in

question and their respective roles in the Bank transactions. 

Accordingly, we have, when appropriate, expanded the parties'

contentions to include all of the banks in question.

tions will not be ignored or recharacterized for Federal tax purposes solely because relationships exist among the persons involved in them. See Goodman v. Commissioner, 74 T.C. 684, 707-

709 (1980), affd. without published opinion 673 F.2d 1332 (7th

Cir. 1981).

III. Positions of the Parties With Respect

To the Transactions at Issue72 

A. Bank Transactions73

1. Respondent's Position

Respondent concedes that loans were, in fact, made to

Radcliffe and to BOT in the Bank transactions and that those

corporations paid interest with respect to those loans. Thus, as

she acknowledges, "This controversy involves the identity of the

true lender of the funds borrowed by BOT and Radcliffe and the

true recipient of the interest paid by BOT and Radcliffe." It is

respondent's position that, in substance, one or more of the

foreign corporations pledging collateral, and not the U.S. banks

in question, made the Bank loans at issue to Radcliffe and to BOT

and Radcliffe and BOT paid interest to those corporations, and
- 105 -

74 Respondent does not argue that the Bank transactions are

subject to recharacterization under the interdependence test. We

therefore do not consider the application of that test to those

transactions.

not to those banks. Respondent asserts that the banks in question were used as mere conduits between the borrower (Radcliffe

or BOT) and the actual lender (one or more of those foreign

corporations) and that those banks served no purpose other than

to attempt to enable the foreign corporations pledging collateral

to escape tax on the interest that she alleges was, in substance,

paid to them by Radcliffe and BOT. The reason respondent espouses for her position is that the foreign corporations pledging

collateral were "the ultimate source of the loans to BOT and

Radcliffe."

To support her position, respondent relies on two of the

three tests (viz., the binding commitment test and the end result

test)74 that courts have applied in determining whether to invoke

the step transaction doctrine. Respondent contends that the

binding commitment test is satisfied because--

petitioner, for each of the Foreign Corporations [pledging collateral], made a binding commitment to the U.S.

banks [in question] to make funds available to the

banks [in question] for BOT and Radcliffe. In each

case the two separate transactions, a loan from the

U.S. bank [in question] and a deposit in a U.S. or

foreign bank, were linked by this binding commitment. 

Neither aspect of the transaction would have occurred

without the other, and the completion of the loan side

of the transaction required the simultaneous completion

of the other side, that is, the deposit and pledge. In

the case of each loan to BOT or Radcliffe, there was a

corresponding deposit, made under a binding commitment,

in the same amount to either the U.S. bank [in ques-
- 106 -

tion], or its foreign affiliate. [Fn. ref. omitted.]

Respondent contends that the end result test is satisfied because--

at the time the deposits [of the foreign corporations

pledging collateral] were made, BOT and Radcliffe

intended to obtain loans in amounts equal to the corresponding deposits, with tax avoidance as the planned

outcome of the two steps. The Foreign Corporations

[pledging collateral] made the deposits intending to

make funds of an equal amount available to BOT and

Radcliffe without incurring any U.S. tax liabilities. 

BOT and Radcliffe borrowed the funds intending to incur

interest expense to reduce their respective current and

future U.S. tax liabilities. All the parties intended

that BOT and Radcliffe obtain loans from related offshore parties and that interest be paid offshore with

no tax consequences to the recipients of the interest.

Respondent further argues that, in addition to attempting to

allow the foreign corporations pledging collateral to escape tax

on the interest that, in substance, was paid to them by Radcliffe

or BOT, the Bank transactions attempted to enable Radcliffe and

BOT to shelter their respective income from tax for the years at

issue by generating interest deductions.

Presumably because the relationships of the persons involved

in a transaction are factors that we may consider in deciding

whether the transaction should be recharacterized for Federal tax

purposes, respondent advances certain contentions concerning the

relationships of the persons involved in the Bank transactions. 

In this connection, respondent acknowledges that during the years

at issue the banks in question (1) were engaged in commercial

banking and therefore were cognizable for Federal tax purposes

under Moline Properties, Inc. v. Commissioner, 319 U.S. 436
- 107 -

(1943), and (2) were not controlled by Radcliffe, BOT, or the

foreign corporations pledging collateral. However, respondent

asserts that the involvement of those banks does not necessarily

insulate the Bank transactions from being recharacterized for

Federal tax purposes, especially where, according to respondent,

those banks desired to accommodate, and were susceptible to

influence by, petitioner, Radcliffe and/or BOT, and the foreign

corporations pledging collateral.

Respondent also contends that during the years at issue

petitioner controlled the foreign corporations pledging collateral through his ownership of the stock, and/or his position as a

director and/or an officer, of those corporations. (Hereinafter,

that contention will be referred to as respondent's control

contention.) Respondent further argues that the Bank transactions would still be subject to recharacterization even if the

Court were not to accept respondent's control contention.

2. Petitioner's Position

a. Petitioner's Principal Arguments

It is petitioner's position that, in both form and substance, each of the Bank transactions was a loan from the U.S.

bank in question to Radcliffe or BOT. As we understand his

position, petitioner contends that because the U.S. banks in

question satisfied the tests of Moline Properties, Inc. v. Commissioner, supra, during the years at issue and therefore were

cognizable for Federal tax purposes, their respective roles in
- 108 -

75 We note that petitioner, intentionally or inadvertently,

omitted the additional requirement imposed by the Supreme Court

that the multiple-party transaction be "imbued with tax-independent considerations". Frank Lyon Co. v. United States, 435 U.S.

561, 583-584 (1978).

the Bank transactions in which each was involved cannot be disregarded.

Although not altogether clear, petitioner appears to argue

further that the form of each of the Bank transactions should be

respected because it satisfies the test of Frank Lyon Co. v.

United States, 435 U.S. 561, 583-584 (1978). According to petitioner, each such transaction was "a genuine multiple-party

transaction with economic substance which * * * [was] compelled

or encouraged by business or regulatory realities, and * * *

[was] not shaped solely by tax-avoidance features that have

meaningless labels attached".75

Relying on Newman v. Commissioner, 902 F.2d 159, 163-164 (2d

Cir. 1990), vacating and remanding T.C. Memo. 1988-547, petitioner contends that, in order for the form of a transaction to

be respected, only one person involved in the transaction--a

person who need not be the taxpayer--must have a nontax, business

purpose for that form. Petitioner asserts that each party to the

Bank transactions had a nontax, business purpose for the form of

those transactions.

To counter respondent's argument that the Bank transactions

attempted to enable Radcliffe and BOT to shelter their respective

income from tax for the years at issue by generating interest
- 109 -

76 Petitioner seems to contend, and respondent does not dispute,

that after S.C. Gaw's death in October 1983 petitioner's mother

acquired all of the stock of Merit and therefore indirectly

acquired all of the stock of Merit's wholly owned subsidiary,

Pempire. The parties stipulated that petitioner acquired all of

the stock of Pempire no later than July 1984.

deductions, petitioner points out that interest deductions attributable to the loans at issue provided little benefit to

Radcliffe and BOT for certain years at issue. Indeed, according

to petitioner, such deductions gave no benefit to Radcliffe and

BOT for other years at issue because those corporations would

have reported losses in their income tax returns for such other

years without taking account of the interest deductions claimed

with respect to the loans in question.

As was true of respondent, petitioner advances certain

contentions concerning the relationships of the persons involved

in the Bank transactions. Petitioner contends that during the

years at issue the banks in question were (1) "commercial banks

engaged in the commercial banking activity" and (2) independent

of Radcliffe, BOT, or the foreign corporations pledging collateral in that they were not subsidiaries of or otherwise controlled by those companies. Petitioner further asserts that

during those years Mme. Koo owned the foreign corporations pledging collateral, with the exception of Merit and Pempire,76 implying, although never explicitly contending, that she controlled

those corporations. (Hereinafter, that contention will be referred to as petitioner's control contention.)
- 110 -

77 Petitioner does not otherwise argue and has presented no

evidence that, assuming arguendo we were to sustain respondent's

determinations with respect to the Bank transactions, a portion

of the interest that Radcliffe and BOT, in form, paid with

respect to the Bank loans should not be subject to tax and

withholding because such portion was retained by the U.S. banks

in question (as, for example, a fee for serving as a conduit) and

was not, in substance, paid to any of the foreign corporations

pledging collateral. Consequently, we do not consider that

question.

b. Petitioner's Alternative Arguments

Petitioner advances alternative arguments applicable to

certain of the Bank transactions (viz., BB Loan No. 1, BB Loan

No. 2, BB Loan No. 3, the UB $570,000 renewed loan, and the UB

$325,000 loan) in an effort to establish that the form of those

transactions should be respected. Petitioner argues that in the

event BB Loan No. 1 were recharacterized in the manner sought by

respondent, that loan should be treated as a loan from a foreign

lender to Radcliffe only to the extent of the Intercontinental

$450,000 deposit. Petitioner also argues that interest paid

after July 18, 1984, with respect to the Bank transactions that

were, in form, secured by deposits in the name of Intercontinental, Traveluck, Double Wealth, and Forward should not be subject

to tax and withholding because interest payable on indebtedness

of Radcliffe and of BOT to those corporations after that date is

or could have been exempt from tax and withholding as portfolio

interest under section 881(c)(2).77

B. Horbury Transaction

1. Respondent's Position

While conceding that a loan, in fact, was made to BOT in the
- 111 -

Horbury transaction, respondent argues that petitioner has not

satisfied his burden of proving, inter alia, that, in substance,

Horbury, and not Pioneer, was the lender with respect to that

transaction or that the interest paid in 1984 by BOT to Horbury,

which was incorporated in the Netherlands, otherwise was exempt

from tax under the U.S.-Netherlands treaty. Although

respondentdoes not expressly argue that petitioner has failed to

establish a nontax, business purpose for the form of the Horbury

transaction, she does cite Aiken Indus. Inc. v. Commissioner, 56

T.C. 925 (1971), where we found that only a tax avoidance purpose

existed for the form of the transaction there involved. We thus

understand respondent to be arguing that petitioner has not

established a nontax, business purpose for the form of the Horbury transaction.

2. Petitioner's Position

Petitioner argues that the interest at issue in the Horbury

transaction is exempt from U.S. taxation and withholding under

the U.S.-Netherlands treaty. In this connection, he contends

that, based on, inter alia, allegations in his testimony concerning that transaction, the Court should create a presumption,

which respondent should be required to rebut, that that interest

is exempt from U.S. taxation.
- 112 -

IV. Resolution of Certain Questions That Relate

to All or Some of the Transactions at Issue 

Having set forth the positions of the parties with respect

to the various matters they believe are important to resolving

the issues presented in these cases, we first decide (A) certain

questions they raise that relate to all the transactions at issue

(namely, (1) whether the relationships among the persons involved

in each of those transactions are such that they are factors we

will take into account in deciding whether any of those transactions should be recharacterized and (2)(a) whether the form of

each of those transactions had a nontax, business purpose and 

(b) whether the interest deductions claimed by Radcliffe and BOT

indicate an intention to minimize tax with respect to any of

those transactions) and (B) certain questions they raise that

relate only to the Bank transactions (namely, (1) whether the

binding commitment test of the step transaction doctrine applies

to any of the Bank transactions and (2) whether the role of the

banks in question in any of the transactions in which each of

those banks was involved may be ignored or recharacterized even

though the parties agree on brief that those banks were engaged

in commercial banking and that they were not controlled by

Radcliffe, BOT, or the foreign corporations pledging collateral). 

After deciding those questions, we analyze the transactions at

issue to determine whether the form of each of those transactions
- 113 -

78 One of petitioner's alternative arguments relates to respondent's control contention. He argues that if respondent believes

that he owned a controlling stock interest in the foreign corporations pledging collateral, she should have determined that

those corporations were CFC's as defined in subpart F of the Code

and that petitioner is taxable under that subpart on the interest

received by those corporations, rather than having determined

deficiencies in the respective withholding tax liabilities of

Radcliffe and BOT. The short answer to that argument is that

respondent is free to make whatever determinations she chooses;

whether the determinations that respondent makes should be

sustained is for the Court to decide.

79 Respondent makes general and sweeping allegations on brief

regarding petitioner's stock ownership of the foreign corporations pledging collateral. She then concludes from those allegations that petitioner controlled those corporations. However,

with respect to Merit, respondent seems to admit that petitioner's mother controlled Merit throughout the period during the

years at issue in which Merit's deposit secured the Union Bank

$570,000 loan to BOT (viz., from January until March 1984).

 With respect to Pioneer and its two wholly owned subsidiaries

Multi-Credit and Mandalay, respondent contends that during the

years at issue petitioner owned an amount of stock that, albeit

less than all of the stock of Pioneer, gave him "effective

control" of that corporation and therefore of those subsidiaries.

(continued...)

should be recharacterized, as respondent contends, or respected,

as petitioner contends.

A. Resolution of Certain Questions That 

Relate to All the Transactions at Issue 

1. Relationships Among the Persons

Involved in the Transactions at Issue

a. Bank Transactions

Respondent contends that petitioner controlled all of the

foreign corporations pledging collateral78 through his ownership

of the stock,79 and/or his position as a director and/or officer,
- 114 -

79(...continued)

 With respect to Pempire, the deposit of which was pledged as

collateral for the UB $1,830,000 loan made to BOT in August 1984,

as stated supra note 76, the parties stipulated that petitioner

acquired all of the stock of Pempire no later than July 1984.

80 Respondent does not point to any portion of the record supporting her allegation on brief that, and nothing in the record

establishes whether or not, petitioner was a director and/or an

officer of Intercontinental and Merit during the years at issue.

81 The parties appear to agree on brief that petitioner's mother

controlled Merit at all relevant times. See supra note 76 and

first paragraph note 79.

82 The insufficiency of the record is illustrated by the follow-

(continued...)

of those corporations.80 She further asserts on brief that the

banks in question desired to accommodate, and were susceptible to

influence by, petitioner, Radcliffe and/or BOT, and the foreign

corporations pledging collateral. Petitioner contends that Mme.

Koo controlled the foreign corporations pledging collateral,

except Merit and Pempire, and that the banks in question were

commercial banks and were not controlled by Radcliffe, BOT, or

the foreign corporations pledging collateral.

Based on our review of the entire record in these cases, we

find that, with the exception of Pempire in which the parties

stipulated that petitioner owned a controlling stock interest no

later than July 1984,81 the evidence in the record is insufficient to enable us to determine whether, during the years at

issue, petitioner or Mme. Koo owned a controlling stock interest

in, or otherwise controlled, any of the foreign corporations

pledging collateral.82
- 115 -

82(...continued)

ing examples. To support her control contention with respect to

Pioneer, respondent essentially relies on the testimony of Henry

Gaw, petitioner's brother, concerning two conversations that he

had with petitioner in 1980. In the first conversation, petitioner informed Henry Gaw that he owned as much stock in Pioneer

as his father did, which Henry Gaw understood to be between 19

and 25 percent. In the second conversation, petitioner informed

Henry Gaw that he had purchased from Mme. Koo an additional

amount of stock that, combined with the stock he already owned,

gave him a controlling interest in Pioneer (although Henry Gaw

could not recall whether petitioner specified the percentage of

Pioneer's stock that petitioner informed him he owned). While we

have no reason to doubt Henry Gaw's credibility, we do not find

that that testimony, standing alone, establishes respondent's

allegation that petitioner owned a controlling interest in

Pioneer during the years at issue. 

 To support his control contention with respect to Double

Wealth and Forward, petitioner relies on his testimony that Mme.

Koo owned those corporations. Petitioner did not testify that

Mme. Koo was the only owner of those corporations or that Mme.

Koo owned a controlling interest in them. We found petitioner's

testimony about Mme. Koo's ownership of Double Wealth and Forward

vague and conclusory, and, for the reasons discussed above and

based on our observation of his demeanor at trial, we generally

did not find him to be credible. Petitioner also relies to

support his control contention on certain instruments of transfer

purporting to effect the issuance or transfer to Mme. Koo of one

share of the stock of Double Wealth and of Forward and a stock

certificate of Forward purporting to certify ownership by her of

one share of the stock of that corporation. Although we have not

admitted those documents into evidence because of respondent's

hearsay objections, even if we had made them part of the record

in these cases, they would not in any event have been conclusive

with respect to petitioner's allegation that Mme. Koo owned a

controlling interest in Double Wealth and in Forward. This is

because, inter alia, petitioner has not shown the total number of

authorized shares of stock of each such corporation that was

issued and outstanding during the years at issue. See second

paragraph supra note 50.

Nonetheless, we have found as facts from our examination of

the entire record in these cases that, prior to and during the

years at issue, petitioner and Mme. Koo had close and amicable

business and family relationships. We have also found as facts
- 116 -

83 It appears that throughout the period in the years at issue

during which Merit's deposit secured the $570,000 loan to BOT

(viz., from January until early March 1984), Merit owned all of

the stock of Pempire, and thus indirectly all of the stock of

BOT. As stated supra note 76, the parties stipulated that petitioner acquired all the stock of Pempire, and thus indirectly all

of the stock of BOT, a wholly owned subsidiary of Pempire, no

later than July 1984. We will consider the relationship of

Merit, Pempire, and BOT in deciding whether that loan transaction

should be recharacterized.

that, during the years at issue, the banks in question desired to

accommodate, and were susceptible to influence by, petitioner,

Mme. Koo, Radcliffe and/or BOT, and the foreign corporations

pledging collateral that were involved in the Bank transactions. 

On the record before us, we conclude that the relationships

during the years at issue of the persons involved in each of the

Bank transactions were such that they are factors we will take

into account in deciding whether the form of each of those transactions should be ignored or recharacterized.83 See Wrenn v.

Commissioner, 67 T.C. at 584; Aiken Indus., Inc. v. Commissioner,

56 T.C. at 934.

b. Horbury Transaction

During all relevant periods, Horbury was a third-tier

subsidiary of Pioneer. Consequently, whoever controlled Pioneer

during those periods also controlled Horbury. As stated above,

the evidence in the record is insufficient to enable us to determine whether, during the years at issue, petitioner or Mme. Koo

owned a controlling stock interest in, or otherwise controlled,

Pioneer. However, we have found as facts that, prior to and
- 117 -

during the years at issue, close and amicable business and family

relationships existed between petitioner and Mme. Koo. Those

relationships are factors we will take into account in deciding

whether the form of the Horbury transaction should be ignored or

recharacterized. See Wrenn v. Commissioner, 67 T.C. at 584;

Aiken Indus., Inc. v. Commissioner, 56 T.C. at 934.

2. Purpose for the Form of Each

of the Transactions at Issue

a. Whether the Form of Each

of the Transactions at Issue

Had a Nontax, Business Purpose

(1) Bank Transactions

Respondent contends that tax avoidance was the only purpose

for the form of each of the Bank transactions. Petitioner acknowledges on brief that the persons involved in those transactions structured them as loans to Radcliffe and to BOT from the

U.S. banks in question, rather than as direct loans from the

foreign corporations pledging collateral, in order to avoid tax

on the interest that would have been paid through withholding by

Radcliffe and by BOT had those transactions been structured as

direct loans. However, relying on Newman v. Commissioner, 902

F.2d at 163, petitioner contends that only one person involved in

a transaction--who need not be the taxpayer--must have a nontax,

business purpose for the form of a transaction in order for that

form to be respected and that each person involved in each of the

transactions at issue had a nontax, business purpose for the form

in which it was structured.
- 118 -

84 We note that the instant cases are appealable, absent a

stipulation by the parties to the contrary, to the U.S. Court of

Appeals for the District of Columbia Circuit, and not to the

Court of Appeals for the Second Circuit that decided Newman v.

Commissioner, 902 F.2d 159 (2d Cir. 1990), vacating and remanding

T.C. Memo. 1988-547. Sec. 7482(b).

 We need not decide whether the proposition for which petitioner cites the U.S. Court of Appeals for the Second Circuit in

Newman is a correct interpretation by that court of applicable

Federal tax law.84 This is because, even assuming arguendo that

that court's interpretation were correct, petitioner has not

established that any of the persons involved in any of the Bank

transactions had a nontax, business purpose for the form in which

those transactions were cast.

(a) Bangkok Bank LA Branch

and Union Bank 

Petitioner contends that the U.S. banks in question preferred the form in which the transactions involving them were

cast because (1) their participation afforded them an opportunity

to earn a profit and (2) they preferred cash deposits as collateral for loans over tangible property located outside the

United States since it would have been difficult for them to

protect their security interest in and foreclose against such

property.

With respect to petitioner's first contention (viz., the

U.S. banks in question participated in the transactions involving

them because they afforded them an opportunity to make a profit),

petitioner adduced no proof that the rates of interest payable on
- 119 -

85 Those rates were (1) initially 1.5 percent and thereafter .75

percent in excess of Bangkok Bank LA branch's prime rate for BB

Loan No. 1 and (2) .5 percent in excess of the interest rates on

the respective certificates of deposit securing BB Loan No. 2 and

BB Loan No. 3. That the interest rate on BB Loan No. 1 was

determined by reference to Bangkok Bank LA branch's prime rate

does not, standing alone, establish that that loan afforded that

bank an opportunity to make a profit. In this connection, we

note that an officer of Union Bank stated in the Mar. 3, 1986

letter that that bank lost money on loans it had funded to

Radcliffe and to BOT that bore interest at rates that were equal

to stated percentages in excess of that bank's LIBOR or prime

rate.

86 Respondent suggests on brief that Bangkok Bank LA branch was

not making any profit on the spread between (1) the interest rate

on BB Loan No. 2 and on BB Loan No. 3 and (2) the interest rate

on the certificates of deposit that secured those loans. To

support that suggestion, she points to the Mar. 3, 1986 letter in

which an officer of Union Bank stated that Union Bank was losing

money on transactions with respect to which there was a 1.15

percent spread between (1) the interest rates on certain of Union

Bank's loans to Radcliffe and BOT (viz., the UB $1,300,000 loan

and the UB $1,830,000 loan) and (2) the interest rates on the

deposits in Union Bank that were pledged to secure those loans

(viz., the Pioneer $1,300,000 CD and the Mandalay $1,300,000 CD

in the case of the UB $1,300,000 loan and the Pempire $1,830,000

CD in the case of the UB $1,830,000 loan). We are not willing to

accept respondent's suggestion that we assume that Bangkok Bank

LA branch could not have made a profit on a .5 percent spread

(continued...)

the loans by Bangkok Bank LA branch to Radcliffe85 afforded that

bank an opportunity to earn a profit. The record does not disclose the direct or indirect costs, including overhead, incurred

by Bangkok Bank LA branch with respect to the loans to Radcliffe. 

No representative of Bangkok Bank LA branch or of other branches

of Bangkok Bank Ltd. testified, and none of the documents in the

record indicated, that the loan transactions at issue involving

Bangkok Bank LA branch gave that bank an opportunity to make a

profit.86
- 120 -

86(...continued)

solely because Union Bank was losing money on a 1.15 percent

spread.

87 The rate on the UB $570,000 pre-March 1984 loan, the UB

$570,000 renewed loan, the UB $325,000 loan, and the UB $800,000

Radcliffe loan was 1.5 percent in excess of Union Bank's LIBOR or

1 percent in excess of its prime rate or its reference rate. The

interest rate on the UB $1,300,000 loan and the UB $1,830,000

loan was 1.15 percent in excess of the interest rate on the

certificates of deposit that secured those loans.

Nor did petitioner adduce any proof that the interest rate

on any of the loans at issue to Radcliffe and BOT that UnionBank

had funded87 afforded that bank an opportunity to earn a profit. 

To the contrary, we have found as a fact that those loan transactions did not provide Union Bank with such an opportunity.

An officer of Union Bank, Henry Yung, testified generally

that that bank tried to make a profit on its loans. However, he

did not testify specifically that Union Bank was trying to make a

profit on its loans to Radcliffe and BOT. In fact, he wrote the

March 3, 1986 letter to Patrick Kwok of Standard Chartered Bank

HK, an affiliate of Union Bank, in which he indicated that Union

Bank was losing money on the loans to Radcliffe and to BOT that

it had funded. That letter further stated that Union Bank was

losing money on those loans even when earnings from deposits that

were not connected with those loans also were taken into account

and that Union Bank nonetheless was willing to renew those loans

on terms that would allow it to break even on them. It appears

to us that Union Bank's willingness to renew on break-even terms
- 121 -

88 Respondent contends that it is irrelevant whether the U.S.

banks in question earned or had an opportunity to earn a profit

on the Bank transactions. In view of our finding, we need not

decide whether respondent is correct. We note, however, that the

role of a person in a transaction has been ignored or recharacterized even where that person was allowed to make a profit with

respect to the transaction in which such person was involved. 

See Estate of Weiskopf v. Commissioner, 64 T.C. 78, 96-98 (1975),

affd. without published opinion 538 F.2d 317 (2d Cir. 1976); see

also Davant v. Commissioner, 366 F.2d 874, 878, 881 (5th Cir.

1966), affg. in part, revg. in part on another issue South Texas

Rice Warehouse Co. v. Commissioner, 43 T.C. 540 (1965); Blueberry

Land Co. v. Commissioner, 361 F.2d 93, 98 (5th Cir. 1966), affg.

42 T.C. 1137 (1964).

89 It is noteworthy that petitioner's contention appears to be

at odds with his assertion on brief that Union Bank's security

interest in the cash deposits pledged by Pioneer and Mandalay

that secured the UB $1,300,000 loan was probably unenforceable

because the pledges of those deposits violated Hong Kong cor-

(continued...)

the loans at issue to Radcliffe and to BOT that it had funded was

attributable to a desire to accommodate petitioner. In this

regard, the March 3, 1986 letter stated that Union Bank was

"pleased to have the opportunity to accommodate this valued Group

customer [petitioner] and will entertain all reasonable

requests."

Based on our review of the entire record in these cases,

petitioner has failed to persuade us that the Bank transactions

took the form they did because those transactions afforded the

U.S. banks in question an opportunity to earn a profit.88

With respect to petitioner's second contention (viz., the

U.S. banks in question preferred cash as collateral for loans

over tangible property located outside the United States because

it would have been difficult for them to protect their security

interest in and foreclose against such property),89 petitioner
- 122 -

89(...continued)

porate law. See sec. 157H(2), Companies Ordinance of Hong Kong. 

Although petitioner does not include the deposit of Multi-Credit

that was pledged to secure the UB $800,000 Radcliffe loan in his

assertion, Union Bank's security interest in that deposit also

was probably unenforceable for the same reason, i.e., petitioner's admission that the pledge of that deposit violated Hong Kong

corporate law. See id.

does not cite to any, and we have found no, portion of the record

that shows that any such preference on the part of the U.S. banks

in question affected the form of the Bank transactions.

It is also significant that, during the years at issue,

Union Bank believed that its ability to protect its security

interest in and foreclose against the cash deposits pledged to

secure the loans to Radcliffe and to BOT that it had funded was

impaired by the possibility that the pledges of those deposits

constituted fraudulent conveyances under California law. Under

those circumstances, Union Bank could hardly have considered

those cash deposits a preferred form of collateral.

Based on our review of the entire record in these cases,

petitioner has failed to persuade us that the Bank transactions

took the form they did because the U.S. banks in question preferred the use of cash as collateral for the loan transactions at

issue in which they were involved.

We have found on the instant record that petitioner has not

established that the Bank transactions took the form they did

because of any nontax, business purpose of the U.S. banks in

question that petitioner alleges on brief.
- 123 -

(b) Radcliffe and BOT

As we understand petitioner, he contends that Radcliffe and

BOT had nontax, business purposes for the form of the Bank transactions because (1) by using cash as collateral for the loans at

issue from the U.S. banks in question, Radcliffe and BOT were

able to obtain lower interest rates on such loans than would have

been charged had those loans been secured by second deeds of

trust on real estate and (2) the use of cash collateral obviated

the need to obtain the consent of Lyman Jee, the partner of

Radcliffe and BOT in NMSC and in 300 Montgomery Associates,

respectively, in order to encumber the assets of those partnerships.

With respect to petitioner's first contention (viz.,

Radcliffe and BOT had a nontax, business purpose for the form

ofthe Bank transactions because, by using cash as collateral for

the loans at issue from the U.S. banks in question, Radcliffe and

BOT were able to obtain lower interest rates on such loans than

would have been charged had those loans been secured by second

deeds of trust on real estate), the only evidence on which petitioner relies to support his contention is the testimony of Mr.

Richard Catterton, an executive of Citibank. Mr. Catterton

testified generally that a loan secured by a second mortgage on

real estate would "probably" bear interest at a higher rate than
- 124 -

90 Petitioner's claim on brief based on Mr. Catterton's testimony is rejected by the record herein. By way of illustration,

during the period from May 1981 until at least April 1985, the

interest rate terms for certain loans that Union Bank had outstanding to NMSC and that were secured by a second deed of trust

on NMSC's buildings were the same as the interest rate terms for

certain loans that that bank had outstanding to NMSC, Radcliffe,

and BOT, respectively (viz., the UB $800,000 NMSC loan, the UB

$325,000 loan, and the UB $570,000 pre-March 1984 loan (beginning

in July 1983)) and that were secured by cash deposits of the

foreign corporations pledging collateral. For instance, from May

1981 until September 1982, a loan by Union Bank to NMSC secured

by a second deed of trust on NMSC's buildings and a loan by that

bank to NMSC secured by a cash deposit bore interest at Union

Bank's prime rate plus .75 percent. In addition, from July 1984

until April 1985, Union Bank's terms with respect to the interest

on a loan to NMSC that was secured by a second deed of trust on

NMSC's buildings and certain loans to NMSC and Radcliffe, respectively, that were secured by cash deposits (viz., the UB $800,000

NMSC loan and the UB $325,000 loan) were the same (viz., Union

Bank's LIBOR plus 1.5 percent or its prime rate plus 1 percent). 

In fact, in light of the interest rate terms for a Union Bank

loan to BOT that was secured by a cash deposit (viz., the UB

$570,000 renewed loan first renewal), it is possible that during

a portion of the time that loan was outstanding (viz., from July

1984 until April 1985) it bore a higher interest rate than Union

Bank's loan to NMSC that was secured by a second deed of trust on

NMSC's buildings. This is because the loan that was secured by

the cash deposit was to bear interest at a rate that was equal to

Union Bank's LIBOR plus 1.5 percent or its prime rate plus 1

percent, but that was not less than 1 percent more than the

annualized effective interest rate on the deposit securing that

loan, while the loan secured by NMSC's buildings bore interest at

Union Bank's LIBOR plus 1.5 percent or its prime rate plus 1

percent.

 We note that after S.C. Gaw's death in October 1983 petitioner guaranteed the Union Bank loan to NMSC that was secured by the

second deed of trust on NMSC's buildings, but did not guarantee

any other loan by Union Bank to NMSC, Radcliffe, or BOT. Petitioner does not suggest, and the record does not indicate, that

the presence or absence of petitioner's guarantee would have

affected the interest rate on any of those loans. We also note

that S.C. Gaw guaranteed Union Bank's loans to NMSC and BOT,

respectively, and that that guarantee had no effect on the

(continued...)

a loan secured by a cash deposit.90 He did not testify, and
- 125 -

90(...continued)

interest rate on any of those loans. This is because, to the

extent the record shows such interest rates, they were the same.

91 In fact, the record does not indicate that petitioner even

investigated whether to place additional encumbrances on the

respective real estate held by NMSC and by 300 Montgomery Associates before arranging the pledges of cash deposits that, in

form, collateralized the Bank loans.

92 A further circumstance weighing against that purported purpose for the form of those transactions is Radcliffe's request

that Bangkok Bank LA branch raise the interest rate on BB Loan

No. 2. After the Traveluck $1,625,000 CD was replaced by the

Double Wealth $1,625,000 CD as security for that loan in July

1985, Bangkok Bank LA branch issued to Double Wealth two successive one-month certificates of deposit that matured in August and

September 1985, respectively, and that bore interest at the rate

of 7 percent, which was .5 percent below the 7.5 percent interest

rate on BB Loan No. 2 during that time. Records of Bangkok Bank

LA branch indicate that, by telex dated Aug. 17, 1985, Bangkok

Bank HK branch informed Bangkok Bank LA branch that Radcliffe

preferred to have the interest rate on BB Loan No. 2 set at 8.25

percent until that loan was due on June 11, 1986. That circumstance indicates that Radcliffe did not seek to minimize the

(continued...)

there is no evidence in the record, that the purpose of Radcliffe

and of BOT for using cash as collateral for the Bangkok Bank LA

branch and Union Bank loans at issue was to obtain lower interest

rates on any of those loans.91

 Based on our review of the entire record in these cases,

petitioner has failed to persuade us that the Bank transactions

took the form they did because, by using cash as collateral for

the loans at issue from the U.S. banks in question, Radcliffe and

BOT were able to obtain lower interest rates on those loans than

would have been charged had those loans been secured by second

deeds of trust on real estate.92
- 126 -

92(...continued)

rate of interest on its loans.

93 It is not altogether clear whether petitioner knew when he

made that request in February 1986 that Radcliffe was to acquire

(continued...)

With respect to petitioner's second contention (viz., the

use of cash collateral for the loans at issue from the U.S. banks

in question obviated the need to obtain the consent of Mr. Jee in

order to encumber those partnerships' assets), there is nothing

in the record that supports petitioner's contention that that

need affected the form of any of the Bank transactions. During

the years at issue, Radcliffe and BOT held a majority interest in

NMSC and 300 Montgomery Associates, respectively. Respondent

concedes that Mr. Jee's consent would have been required in order

to encumber the assets of those partnerships, see Cal. Corp. Code

sec. 15009(3)(a) (West 1991), but there is no indication that Mr.

Jee would have refused to grant it. In fact, in February 1986,

apparently in an effort to restructure the existing Bank loans

that were secured by cash deposits, petitioner requested Union

Bank to consider making a new loan to Radcliffe and/or BOT in the

amount of $8,400,000 that would have replaced those existing

loans and that was to be secured by the buildings owned by NMSC

and 300 Montgomery Associates. This indicates to us that petitioner did not consider obtaining Mr. Jee's consent an obstacle

to the funding of loans that were to be secured by those buildings.93 Furthermore, petitioner testified that, in order to
- 127 -

93(...continued)

Mr. Jee's remaining interest in NMSC, which it did in March 1986.

94 Petitioner also contends on brief, relying in part on his

testimony, that (1) he did not have the resources to finance the

acquisition by Radcliffe and by BOT of their interests in NMSC

and 300 Montgomery Associates, respectively; (2) the proceeds of

the loans by the U.S. banks in question to Radcliffe and to BOT

were used for those purposes; and (3) Radcliffe and BOT expected

to make a profit on those acquisitions. Assuming arguendo we

were satisfied that the record in these cases established those

reasons, they would merely provide an overall justification for

the decision of Radcliffe and of BOT to borrow money. They would

(continued...)

assist Mr. Jee, in 1985 he allowed him to encumber NMSC's property with a $5,000,000 second deed of trust. This indicates to us

that the relationship between petitioner and Mr. Jee was such

that his consent could probably have been obtained had it been

requested. We have found nothing in the record before us to

suggest that Radcliffe and BOT could not have encumbered the

assets of the respective partnerships in which they held a majority interest had they desired to do so.

Based on our review of the entire record in these cases,

petitioner has failed to persuade us that the Bank transactions

took the form they did because of the need of Radcliffe and of

BOT to obtain the consent of Mr. Jee before the respective assets

of NMSC and 300 Montgomery Associates could be encumbered.

We have found on the instant record that petitioner has not

established that the Bank transactions took the form they did

because of any nontax, business purpose of Radcliffe and BOT that

petitioner alleges on brief.94
- 128 -

94(...continued)

not provide a nontax, business purpose for the form of the

transactions through which that borrowing was accomplished.

 Petitioner also suggests on brief that the loans at issue

from the U.S. banks in question were obtained from those banks in

order for petitioner, Radcliffe, and BOT to establish relationships with banks in the United States. He does not cite any

evidence in the record showing that establishing relationships

with banks in the United States was a nontax, business purpose

for the form of any of the Bank transactions. Indeed, the record

shows that petitioner sought to take advantage of his existing

banking relationships, rather than establish new ones, in that he

relied on his relationships with Bangkok Bank Ltd., of which

Bangkok Bank LA branch was a branch, and Standard Chartered Bank

PLC and certain of its affiliates including Standard Chartered

Bank HK, affiliates of Union Bank, in obtaining the loans at

issue from the U.S. banks in question.

95 In fact, petitioner testified that Mme. Koo did not want any

assistance she gave him to cost her anything. We take this to

mean, inter alia, that Mme. Koo did not want to incur any tax

liability with respect to any assistance that she and/or corporations petitioner alleges she owned provided to petitioner and/or

corporations he controlled. In this regard, we note that petitioner was familiar with the U.S withholding tax requirements

applicable to interest from a U.S. source that was paid to

foreign corporations.

(c) Foreign Corporations

Pledging Collateral 

Petitioner acknowledges on brief that the persons involved

in the Bank transactions structured those transactions as loans

to Radcliffe and to BOT from the U.S. banks in question, rather

than as direct loans from the foreign corporations pledging collateral, in order to avoid tax on the interest that would have

been paid through withholding by Radcliffe and by BOT had those

transactions been structured as direct loans.95 He contends,

however, that the foreign corporations pledging collateral also
- 129 -

had nontax, business purposes for the form of those transactions,

viz., they desired to (1) earn interest on their deposits and 

(2) assist Radcliffe and BOT.

With respect to petitioner's first contention (viz., the

foreign corporations pledging collateral desired to earn interest

on their deposits), the accomplishment of that alleged objective

was in no way dependent upon the completion of the other steps of

the Bank transactions (i.e., the funding by the U.S. banks in

question of the loans to Radcliffe and to BOT and the granting by

the foreign corporations pledging collateral to those banks of

security interests in those deposits). Therefore, the alleged

objective of the foreign corporations pledging collateral of

earning interest on their deposits does not provide a nontax,

business purpose for the other steps of the Bank transactions.

Based on our review of the entire record in these cases,

petitioner has failed to persuade us that the Bank transactions

took the form they did because the foreign corporations pledging

collateral desired to earn interest on their deposits.

With respect to petitioner's second contention (viz., the

foreign corporations pledging collateral wished to assist

Radcliffe and BOT), such a desire, if true, does not by itself

provide a nontax, business purpose for the form of any of the

Bank transactions. For instance, had those corporations desired

to assist Radcliffe and BOT, with the exception of Pioneer and

its subsidiaries Multi-Credit and Mandalay, nothing in the record
- 130 -

96 A financial statement of Radcliffe, dated Mar. 31, 1985, and

signed by petitioner, indicated that Intercontinental had a loan

outstanding in the amount of $1,625,000 to Radcliffe and that a

loan from Bangkok Bank LA branch to Radcliffe, presumably BB Loan

No. 2, was to be used to replace that loan from Intercontinental.

97 However, petitioner does contend on brief, relying in part on

his testimony, (1) that he replaced a direct loan from Pioneer to

Radcliffe with a loan from Union Bank (viz., the UB $1,300,000

loan) that was secured by a certificate of deposit in the name of

Mandalay because he believed that that form created a less

obvious conflict with Hong Kong corporate law and (2) that

Pioneer and its subsidiaries Multi-Credit and Mandalay also

(continued...)

suggests that those foreign corporations (viz., Intercontinental,

Traveluck, Double Wealth, Merit, Pempire, and Forward) could not

have made direct loans to Radcliffe and BOT. Indeed, the record

indicates that one such loan was made by Intercontinental to

Radcliffe.96

With respect to Pioneer and its subsidiaries Multi-Credit

and Mandalay, as petitioner admits on brief, Hong Kong corporate

law prohibited them from making direct loans to Radcliffe. Sec.

157H(2), Companies Ordinance of Hong Kong. Petitioner also

concedes on brief that Hong Kong corporate law prohibited those

corporations from pledging collateral for loans to Radcliffe by

the U.S. banks in question. Because either form of assistance to

Radcliffe by Pioneer and its subsidiaries Multi-Credit and Mandalay was prohibited by Hong Kong corporate law, petitioner

cannot, and does not, argue that the transactions involving those

corporations took the form that they did in order to comply with

the requirements of Hong Kong corporate law.97
- 131 -

97(...continued)

preferred the form of the Bank transactions involving them for

that reason. We do not accept petitioner's contention that the

form of the transactions at issue involving Pioneer and its

subsidiaries Multi-Credit and Mandalay made their violation of

Hong Kong corporate law less obvious. As just stated, Hong Kong

corporate law prohibited not only direct loans to Radcliffe by

Pioneer and its subsidiaries, but also the pledging by those

corporations of collateral for loans to Radcliffe by the U.S.

banks in question. Furthermore, the parties do not dispute on

brief that in 1983, at the request of petitioner, Union Bank

released its lien on the $800,000 deposit of Multi-Credit that

secured the $800,000 NMSC loan during Multi-Credit's financial

reporting period. That petitioner found it necessary to have

Union Bank release that lien indicates to us that neither he nor

Pioneer and its subsidiaries Multi-Credit and Mandalay believed

that the form of the loan transactions at issue involving those

corporations made their violation of Hong Kong law less obvious.

Based on our review of the entire record in these cases,

petitioner has failed to persuade us that the Bank transactions

took the form they did because the foreign corporations pledging

collateral desired to assist Radcliffe and BOT.

We have found on the instant record that petitioner has not

established that the Bank transactions took the form that they

did because of any nontax, business purpose of the foreign corporations pledging collateral that petitioner alleges on brief.

(d) Summary

We have found on the instant record that petitioner has not

established that the Bank transactions took the form they did

because of any nontax, business purpose on the part of any of the

persons involved in those transactions that petitioner alleges on

brief. The only indication of the purpose for that form is

petitioner's acknowledgment on brief that the persons involved in
- 132 -

98 We reject petitioner's position that under Frank Lyon Co. v.

United States, 435 U.S. at 583-584, the form of the Bank transactions should be respected. In Frank Lyon Co. the Supreme Court

found that the form of the transaction at issue had a nontax,

business purpose. Here, petitioner has failed to establish a

nontax, business purpose for the form of any of the Bank transactions. Moreover, a transaction may pass muster under the test of

Frank Lyon Co. v. United States, 435 U.S. at 583-584, and still

be recharacterized under the substance over form doctrine and

related principles. See Packard v. Commissioner, 85 T.C. 397,

419-422 (1985).

the Bank transactions structured them as loans to Radcliffe and

to BOT from the U.S. banks in question, rather than as direct

loans from the foreign corporations pledging collateral, in order

to avoid tax on the interest that would have been paid through

withholding by Radcliffe and by BOT had those transactions been

structured as direct loans.98

(2) Horbury Transaction

Although respondent does not expressly argue that petitioner

failed to establish a nontax, business purpose for the form of

the Horbury transaction, she does cite Aiken Indus., Inc. v.

Commissioner, 56 T.C. 925 (1971). We held in Aiken that, based

on the facts there involved, including the presence of only a tax

avoidance purpose for the form of the transaction at issue in

that case, the provisions of the applicable U.S.-Honduras income

tax convention did not apply to exempt from tax interest that

was, in form, paid to a Honduran corporation. Id. at 934. We

thus address whether petitioner has shown a nontax, business

purpose for the form of the Horbury transaction.

Based on our review of the entire record in these cases, we
- 133 -

99 Petitioner also argues that if it is respondent's position

that the Bank transactions had no purpose other than tax avoidance, she should have disallowed the interest deductions claimed

by Radcliffe and by BOT with respect to those transactions. As

we indicated supra note 78, respondent is free to make whatever

determinations she chooses. Moreover, as we understand respondent's position, she does not question that interest was paid by

Radcliffe and BOT; rather, it is her contention that, in substance, that interest was paid to the foreign corporations

pledging collateral, and not to the U.S. banks in question.

find that petitioner has failed to establish any nontax, business

purpose for the form of the Horbury transaction.

b. Whether the Interest Deductions

Claimed by Radcliffe and by BOT

Indicate a Tax Avoidance Purpose

for Any of the Transactions at Issue

(1) Bank Transactions

Respondent contends that an additional reason for the Bank

transactions was to generate interest deductions for Radcliffe

and for BOT for the years at issue that enabled them to avoid

Federal tax on their respective income. Petitioner counters that

interest deductions attributable to the loans at issue provided

little benefit to Radcliffe and BOT for certain years at issue

and no benefit for other years because those corporations would

have reported losses in their income tax returns for such other

years without taking account of the interest deductions claimed

with respect to those loans. He contends that, therefore, any

alleged tax benefit from the interest deductions claimed by those

corporations does not justify recharacterizing the Bank transactions.99
- 134 -

We reject the contentions of both parties. There is no

dispute herein that Radcliffe and BOT borrowed funds or that they

paid deductible interest on those borrowed funds. The only

dispute relates to the identity of the lenders of those funds and

of the payees of that interest.

With respect to respondent's contention (viz., an additional

reason for the Bank transactions was to generate interest deductions for Radcliffe and for BOT for the years at issue),

Radcliffe and BOT are entitled to interest deductions on the

funds they borrowed regardless whether we sustain respondent's

theory or petitioner's theory of these cases. Accordingly, we

conclude that the interest deductions claimed by Radcliffe and

BOT for the years at issue with respect to the Bank transactions

do not necessarily indicate a tax avoidance purpose by Radcliffe

or by BOT for those transactions.

With respect to petitioner's contention (viz., the Bank

transactions should not be recharacterized since Radcliffe and

BOT received little benefit from their interest deductions for

certain years at issue and no benefit for other years), the issue

in these cases concerns the respective obligations of Radcliffe

and BOT under section 1442(a) to withhold tax on the interest

that was, in form, paid to the U.S. banks in question, and not

the Federal income tax imposed on the respective income of

Radcliffe and BOT. If we were to sustain respondent's theory

that each of the Bank loans at issue was, in substance, a loan to
- 135 -

100 Moreover, if we were to sustain respondent's theory that the

(continued...)

Radcliffe or BOT from one or more of the foreign corporations

pledging collateral so that the interest on each such loan was,

in substance, paid to one or more of those corporations, we would

conclude that the failure of Radcliffe and BOT to withhold tax on

such interest resulted in the avoidance of such withholding,

regardless whether the interest deductions generated by those

transactions reduced the respective Federal income tax of

Radcliffe and BOT.

 (2) Horbury Transaction

While respondent does not expressly argue that the deduction

claimed by BOT in its 1984 income tax return for interest paid to

Horbury indicates a tax avoidance purpose with respect to the

form of the Horbury transaction, petitioner includes that deduction in his argument that BOT received little benefit from the

interest deductions generated by the transactions at issue. 

Consequently, we address whether BOT's claim to a deduction for

1984 with respect to the Horbury transaction indicates a tax

avoidance purpose by BOT for the form of that transaction.

For the reasons discussed above with respect to the Bank

transactions, we find that the deduction claimed by BOT in its

1984 income tax return with respect to the interest it paid to

Horbury does not necessarily indicate a tax avoidance purpose for

the form of that transaction.100
- 136 -

100(...continued)

Horbury transaction was, in substance, a loan to BOT from a

foreign corporation that was not entitled to the benefits of the

U.S.-Netherlands treaty, we would conclude that the failure of

BOT to withhold tax on the interest paid on such loan resulted in

the avoidance of tax regardless of the extent of the income tax

benefit conferred on BOT by the interest deduction generated by

that transaction.

B. Resolution of Certain Questions That

Relate Only to the Bank Transactions

1. Whether the Binding Commitment Test

of the Step Transaction Doctrine

Applies to Any of the Bank Transactions

Respondent relies upon both the binding commitment test and

the end result test of the step transaction doctrine in arguing

that each of the Bank transactions should be recharacterized as a

loan to Radcliffe or BOT, as the case may be, that was made by

one (and, in certain instances, more than one) of the foreign

corporations pledging collateral. We now address whether the

binding commitment test applies to any of the Bank transactions.

In Commissioner v. Gordon, 391 U.S. 83, 96-98 (1968), the

Supreme Court applied the binding commitment test with respect to

a series of transactions that were implemented over several

years. In the present cases, the various aspects of each of the

Bank transactions were implemented in one year, although the Bank

loans extended beyond the respective years in which they were

funded.

Based on our review of the entire record in these cases, we

find that the binding commitment test, the narrowest of the three
- 137 -

101 As one court has observed, the binding commitment test has

seldom been applied since it was first enunciated. Associated

Wholesale Grocers, Inc. v. United States, 927 F.2d 1517, 1522 n.6

(10th Cir. 1991).

102 The simultaneous funding of each loan and the pledge of the

collateral that secured it appears to be typical of commercial

loan transactions.

tests formulated by the courts under the step transaction doctrine,101 is inapplicable here. The record does not support a

finding that each step in each of the Bank transactions was

carried out pursuant to a binding commitment to do so.102 See

Commissioner v. Gordon, supra; Associated Wholesale Grocers, Inc.

v. United States, 927 F.2d at 1522-1523 n.6; King Enters., Inc.

v. United States, 189 Ct. Cl. 466, 418 F.2d 511, 517-518 (1969). 

Consequently, we reject respondent's argument with respect to the

binding commitment test.

2. Whether the Role of the Banks in

Question in the Bank Transactions

May Be Ignored or Recharacterized

Even Though the Parties Agree on

Brief That Those Banks Were Engaged

in Commercial Banking and That They

Were Not Controlled By Radcliffe,

BOT, or the Foreign Corporations

Pledging Collateral 

Petitioner contends that the banks in question were engaged

in commercial banking and were not controlled by Radcliffe, BOT,

or the foreign corporations pledging collateral. Respondent does

not dispute those facts. However, each party draws a different

conclusion in the face of those facts. Petitioner concludes

that, because of those facts, the role of the banks in question
- 138 -

103 Petitioner appears to advance the same contention under

Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943),

with respect to the role of Horbury in the Horbury transaction.

104 With respect to petitioner's contention that the role of

Horbury in the Horbury transaction may not be disregarded under

the doctrine of Moline Properties, Inc. v. Commissioner, supra,

the record in these cases is insufficient to enable us to conclude whether or not Horbury was formed for a business purpose or

carried on business activity and therefore satisfied one of the

tests of Moline Properties. Even assuming arguendo that Horbury

were to satisfy one of those tests, as stated above, we would

nonetheless be able to ignore or recharacterize its role in that

transaction.

in the Bank transactions at issue may not be disregarded under

Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).103

Respondent concludes that despite those facts and that the banks

in question were cognizable for Federal tax purposes under Moline

Properties, Inc. v. Commissioner, supra, the role of those banks

as lenders may be disregarded.

We agree with respondent that the role of a person involved

in a transaction may be ignored or recharacterized even if that

person (1) is otherwise engaged in business and therefore is cognizable for Federal tax purposes under Moline Properties, Inc. v.

Commissioner, supra, and (2) is not controlled by any of the

other persons involved in that transaction.104 See Koehring Co.

v. United States, 583 F.2d at 320; Burns v. Commissioner, 78 T.C.

at 212-213; Estate of Weiskopf v. Commissioner, 64 T.C. at 93-98;

Bank of Am. Natl. Trust & Sav. Association v. Commissioner, 15

T.C. at 552-553.
- 139 -

105 The record relating to the transactions involving BB Loan

Nos. 2 and 3 is relatively complete. Although the record relating to the transactions involving the UB $800,000 Radcliffe loan,

the UB $1,300,000 loan, and the UB $1,830,000 loan are not poorly

developed, there are a number of gaps in the evidence with

respect to each of those transactions. 

V. Analysis of the Transactions at Issue

We note again that, in general, the record in these cases is

poorly developed, inconclusive, and/or unreliable in many respects, including certain material respects.105 Despite the state

of the record in these cases, we have been able to find, inter

alia, that (1) the relationships among the persons involved in

the transactions at issue (viz., the close and amicable business

and family relationships between petitioner and Mme. Koo and, in

the case of the Bank transactions, the desire of the banks in

question to accommodate petitioner, Mme. Koo, Radcliffe and/or

BOT, and the foreign corporations pledging collateral that were

involved in those transactions and their susceptibility to

influence by those persons) are factors we will take into account in deciding whether to recharacterize those transactions;

(2) petitioner failed to establish a nontax, business purpose for

the form of any of the transactions at issue and acknowledges on

brief a tax avoidance purpose for that form; (3) the record does

not support application of the binding commitment test of the

step transaction doctrine to any of the Bank transactions; and

(4) the role of the banks in question in the Bank transactions
- 140 -

may be ignored or recharacterized even though they were otherwise

engaged in business and were not controlled by Radcliffe, BOT, or

the foreign corporations pledging collateral.

Additional factors that we consider relevant to our analysis

of the transactions at issue include (1) the nature of the relationships, if any, between (a) the respective rates of interest

on the loans at issue and the cash deposits that secured them and

(b) the respective dates on which interest was payable or paid on

those loans and deposits and (2) whether the respective cash

deposits that secured the loans at issue were applied to repay

those loans. With respect to the last factor, it is significant

that there is nothing in the record to suggest that Radcliffe or

BOT was in default on any of the Bank loans at issue at the time

such loans were repaid, and petitioner does not attempt to explain why any of those loans was repaid in the manner in which it

was. Petitioner does not argue, and the record does not support

a finding, that the manner in which repayment of any of the Bank

loans was made was attributable to any financial or other difficulties that he, Radcliffe or BOT, as the case may be, and/or

NMSC or 300 Montgomery Associates, as the case may be, were

experiencing at the time any of those loans was repaid. Instead,

petitioner alleges on brief that Radcliffe and BOT had

sufficientnet worth and cash flow to repay their respective Bank

loans. If the role of the foreign corporations pledging collateral in the various Bank transactions had, in substance, been
- 141 -

limited to pledging their respective cash deposits as security,

it would seem to us, absent any explanation by petitioner, that

Radcliffe or BOT itself, as the case may be, would have repaid

each of the Bank loans, as petitioner alleges each could have

done, rather than having had the foreign corporations pledging

collateral repay those loans.

Bearing in mind the findings we have already made, we turn

to each of the transactions at issue.

A. Bank Transactions

1. BB Loan No. 1 Transaction

While conceding that a loan, in fact, was made to Radcliffe

in the BB Loan No. 1 transaction, respondent contends that one or

more foreign corporations pledging collateral including Intercontinental, and not Bangkok Bank LA branch, was "the ultimate

source" of that loan. She asserts that "at least" the Intercontinental $450,000 deposit was pledged as security in connection

with the BB Loan No. 1 transaction and that she was unable to

obtain information concerning any other deposits pledged with

respect to that transaction.

With respect to respondent's suggestion that there were

other deposits besides the Intercontinental $450,000 deposit that

were pledged as security in connection with the BB Loan No. 1

transaction, we are unable to conclude from the record before us

that there were any such additional deposits. With respect to

respondent's alleged inability to obtain information relating to
- 142 -

106 We also note that during the trial of these cases petitioner

provided respondent with copies of certain records of the Los

Angeles or the Hong Kong branch of Bangkok Bank Ltd. that respondent did not seek to introduce into evidence.

any such other deposits, we note that respondent did not represent to the Court in her motion to compel production of documents

or in the evidentiary hearing on that motion that she sought

documents concerning the BB Loan No. 1 transaction that petitioner failed to produce or that the documents she sought that

petitioner failed to produce related to that loan.106

The only foreign corporation pledging collateral involved in

the BB Loan No. 1 transaction that is disclosed by the record in

these cases is Intercontinental. The deposit pledged by Intercontinental was in the amount of $450,000. BB Loan No. 1 was

funded by Bangkok Bank LA branch in the amount of $1,000,000. 

Consequently, under respondent's theory in these cases, Intercontinental could not have been the "ultimate source" of the full

amount of that loan, although it could have been the "ultimate

source" of $450,000 of that loan. On the record before us, we

limit our analysis of the BB Loan No. 1 transaction to $450,000

of BB Loan No. 1 throughout the period during which the Intercontinental $450,000 deposit served, in form, as security as part of

that loan transaction.

The record establishes that, in form, Bangkok Bank Ltd.

through its Los Angeles branch funded a $1,000,000 loan to

Radcliffe and through its Hong Kong branch provided a $1,000,000
- 143 -

standby letter of credit guaranteeing that loan and held a

$450,000 deposit in the name of Intercontinental that, in turn,

secured that standby letter of credit and thereby secured that

loan to the extent of $450,000. The record also shows that, in

form, Bangkok Bank Ltd. through its Los Angeles branch received

interest from Radcliffe with respect to BB Loan No. 1 and, although the record is silent on this point, Bangkok Bank Ltd.

through its Hong Kong branch presumably paid interest to Intercontinental on its $450,000 deposit.

 Petitioner asserts, and respondent does not dispute, that

Bangkok Bank Ltd. through its Los Angeles branch had sufficient

funds to make BB Loan No. 1 to Radcliffe without that bank

through its Hong Kong branch having had the Intercontinental

$450,000 deposit. Presumably Bangkok Bank Ltd. through its Hong

Kong branch also had sufficient funds to pay interest on the

Intercontinental $450,000 deposit without that bank through its

Los Angeles branch having received interest from Radcliffe with

respect to BB Loan No. 1.

Nonetheless, we are satisfied from the record before us,

including (1) the relationships of (a) Bangkok Bank Ltd. and its

Los Angeles and Hong Kong branches with petitioner, Mme. Koo,

Radcliffe, and Intercontinental and (b) petitioner with Mme. Koo

and (2) the lack of a nontax, business purpose for the form of

the BB Loan No. 1 transaction, that Bangkok Bank Ltd. (1) through

its Hong Kong branch had a source (viz., the Intercontinental
- 144 -

107 The record does not disclose the interest rates applicable

to or the amounts of interest payable or paid on the

Intercontinental $450,000 deposit. Nonetheless, we find it

reasonable to infer from the evidence in the record, in particular the evidence relating to the transactions involving BB Loan

Nos. 2 and 3, that the interest rates applicable to and the

amounts of interest payable or paid on that deposit were always

less than the interest rates applicable to and the amounts of

interest payable or paid on BB Loan No. 1.

$450,000 deposit) for $450,000 of the $1,000,000 BB Loan No. 1 it

funded through its Los Angeles branch and (2) through its Los

Angeles branch had a source (viz., the interest paid by Radcliffe

to Bangkok Bank LA branch on BB Loan No. 1) for the interest it

presumably paid through its Hong Kong branch on the Intercontinental $450,000 deposit. Moreover, Bangkok Bank Ltd. (1) through

its Hong Kong branch had an inflow of funds (viz., the Intercontinental $450,000 deposit) that was sufficient to cover $450,000

of its outflow of funds through its Los Angeles branch for the

$1,000,000 BB Loan No. 1 to Radcliffe and (2) through its Los

Angeles branch had an inflow of funds (viz., the interest paid by

Radcliffe to Bangkok Bank LA branch on BB Loan No. 1) that was

sufficient to cover its outflow of funds through its Hong Kong

branch for the interest presumably paid on the Intercontinental

$450,000 deposit.107

We cannot determine the nature of the relationships, if any,

between (1) the respective rates of interest on BB Loan No. 1 and

the Intercontinental $450,000 deposit and (2) the respective

dates on which interest was payable or paid on that loan and that
- 145 -

deposit. This is because the record is inadequate. In this

regard, while the record shows certain facts relating to that

inquiry with respect to BB Loan No. 1 (viz., the interest rate

and actual interest rate percentages that were in effect for the

period during which that loan was outstanding and the dates on

which interest was payable and paid on that loan), the record

does not disclose those facts with respect to the Intercontinental $450,000 deposit.

Turning to whether the Intercontinental $450,000 deposit

that secured BB Loan No. 1 was applied to repay that loan, petitioner admits on brief, and respondent does not dispute, that on

June 30, 1986, the Intercontinental $450,000 deposit was applied

to reduce the then outstanding $600,000 balance of BB Loan No. 1

to $150,000.

Based upon our examination of the entire record in these

cases, and bearing in mind the substantial gaps in the evidence

with respect to the BB Loan No. 1 transaction, we find that

petitioner has failed to carry his burden of showing that respondent erred in determining that Radcliffe was required to withhold

tax on the interest that it, in form, paid to Bangkok Bank LA

branch on $450,000 of Bangkok Bank Loan No. 1 for the period

during which the Intercontinental $450,000 deposit served, in

form, as security for that loan (viz., from on or about May 17,
- 146 -

108 Petitioner argues, in the alternative, with respect to BB

Loan No. 1 (as well as BB Loan Nos. 2 and 3, the UB $570,000

renewed loan, and the UB $325,000 loan) that if the Court were to

sustain respondent's determinations, the interest paid after July

18, 1984, by Radcliffe or BOT, as the case may be, would not be

subject to withholding tax because either the interest is portfolio interest or the loan transaction could have been restructured

to qualify the interest paid thereunder as portfolio interest. 

On the record before us, we find that petitioner has not demonstrated that the interest paid by Radcliffe in the BB Loan No. 1

transaction (or in any other Bank loan transaction at issue as to

which he advances this alternative contention) qualifies as

portfolio interest. For example, petitioner has not shown on the

instant record that the interest at issue was not received by a

10-percent shareholder within the meaning of sec. 871(h)(3)(B). 

He therefore has not established that sec. 881(c)(3)(B) does not

apply to the interest at issue. With respect to his contention

that BB Loan No. 1 (or any of the other loan transactions as to

which he advances this alternative contention) could have been

restructured to qualify the interest thereon as portfolio interest, we note that a transaction is to be given effect in accordance with what actually occurred, and not with what might have

occurred. See Commissioner v. National Alfalfa Dehydrating and

Milling Co., 417 U.S. 134, 148 (1974).

 Petitioner advances an additional alternative argument

relating solely to the BB Loan No. 1 transaction, which is

apparently based upon the parties' erroneous stipulation that the

$1,000,000 standby letter of credit was issued with respect to

petitioner, rather than Radcliffe, see supra note 9. According

to petitioner, if the Court were to sustain respondent's determination, BB Loan No. 1 would, in substance, be from petitioner

to Radcliffe and, in that event, any interest paid with respect

to that loan would not be subject to withholding under sec.

1441(a) because petitioner was a U.S. citizen during the years at

issue. We disagree. We have found that the $1,000,000 standby

letter of credit was issued with respect to Radcliffe, and not

petitioner. Moreover, on the record before us, we do not find

petitioner's purported promise to indemnify Bangkok Bank HK

branch for any losses it might have incurred with respect to its

$1,000,000 standby letter of credit to have been intended by the

persons involved in the BB Loan No. 1 transaction to be meaningful, at least to the extent of $450,000 of that loan. We therefore do not find that that purported personal obligation of petitioner establishes that, in substance, a loan was made to

Radcliffe by petitioner.

1984, until June 30, 1986).108 Accordingly, we sustain respon-
- 147 -

dent's determinations that (1) for the period that commenced on

or about May 17, 1984, the date on which BB Loan No. 1 was funded, and ended on June 30, 1986, the date on which the Intercontinental $450,000 deposit was applied to reduce the then outstanding balance of that loan, Radcliffe was required to withhold tax

on the full amount of the interest that it, in form, paid to

Bangkok Bank LA branch on $450,000 of BB Loan No. 1 and (2) petitioner, as transferee of Radcliffe, is liable for that withholding tax liability of Radcliffe.

2. BB Loan No. 2 Transaction

The record establishes that, in form, Bangkok Bank Ltd.

through its Los Angeles branch funded a $1,625,000 loan to

Radcliffe, later increased to $2,025,000, and held various certificates of deposit initially in the name of Traveluck and

thereafter in the name of Double Wealth that secured that loan. 

The record also shows that, in form, Bangkok Bank Ltd. through

its Los Angeles branch received interest from Radcliffe with

respect to BB Loan No. 2 and paid interest initially to Traveluck

and thereafter to Double Wealth on their respective certificates

of deposit.

Petitioner asserts, and respondent does not dispute, that

Bangkok Bank Ltd. through its Los Angeles branch had sufficient

funds to make BB Loan No. 2 to Radcliffe without having had the
- 148 -

deposit represented by the certificates of deposit that were

initially in the name of Traveluck and thereafter Double Wealth. 

Presumably Bangkok Bank Ltd. through that same branch also had

sufficient funds to pay interest on the certificates of deposit

that secured BB Loan No. 2 without its having received interest

from Radcliffe with respect to BB Loan No. 2.

Nonetheless, we are satisfied from the record before us,

including (1) the relationships of (a) Bangkok Bank Ltd. and its

Los Angeles branch with petitioner, Mme. Koo, Radcliffe,

Traveluck, and Double Wealth and (b) petitioner with Mme. Koo and

(2) the lack of a nontax, business purpose for the form of the BB

Loan No. 2 transaction, that Bangkok Bank Ltd. through its Los

Angeles branch (1) had a source (viz., the certificates of deposit initially in the name of Traveluck and thereafter Double

Wealth) for BB Loan No. 2 and (2) had a source (viz., the interest paid by Radcliffe on BB Loan No. 2) for the interest it paid

on the various certificates of deposit that secured that loan. 

Moreover, Bangkok Bank Ltd. through its Los Angeles branch 

(1) had an inflow of funds (viz., the certificates of deposit

initially in the name of Traveluck and thereafter Double Wealth)

that was sufficient to cover its outflow of funds for BB Loan No.

2 and (2) had an inflow of funds (viz., the interest paid by

Radcliffe on BB Loan No. 2) that was sufficient to cover its
- 149 -

109 Petitioner suggests on brief that the due dates of the

interest on BB Loan No. 2 (as well as on BB Loan No. 3) were made

coextensive with the due dates of the interest on the various

certificates of deposits that secured that loan (as well as BB

Loan No. 3) "apparently" to keep track of the .5 percent difference between the loan interest rates and the deposit interest

rates. That suggestion serves only to point out the importance

to the persons involved in the BB Loan No. 2 transaction (as well

as the BB Loan No. 3 transaction) of ensuring that the loan

interest payments corresponded with the interest payments on the

various certificates of deposit.

outflow of funds for the interest paid on the various certificates of deposit that secured that loan.

With respect to the nature of the relationships disclosed by

the record between (a) the respective rates of interest on BB

Loan No. 2 and the various certificates of deposit that, in form,

secured that loan and (b) the respective dates on which interest

was payable or paid on that loan and those certificates, the

record establishes that, throughout the period during which that

loan was outstanding, the interest rate on that loan was .5

percent above the corresponding interest rate on those certificates. In addition, petitioner acknowledges on brief that interest was payable on BB Loan No. 2 by Radcliffe to Bangkok Bank

Ltd. through its Los Angeles branch on the same day of the month

on which interest was payable by that bank through that same

branch on the various certificates of deposit that, in form,

secured that loan.109 Consequently, even though, as petitioner
- 150 -

110 See first paragraph supra note 108 for our views on petitioner's alternative argument about portfolio interest.

points out, Bangkok Bank Ltd. through its Los Angeles branch

could be considered to have "owned" the interest that Radcliffe,

in form, paid to it with respect to BB Loan No. 2, the inflow of

those interest payments to it was matched in both amount (except

for the .5 percent difference between the interest rate on that

loan and the interest rate on each of the various certificates of

deposit that, in form, secured that loan) and time by the outflow

of interest payments by it initially to Traveluck and thereafter

to Double Wealth on the various certificates of deposit that

secured BB Loan No. 2.

Turning to whether the Double Wealth $2,025,000 CD that

secured BB Loan No. 2 was applied to repay that loan, the record

discloses that that loan was repaid on September 12, 1986, with

the proceeds represented by that certificate of deposit.

Based on our examination of the entire record in these

cases, we find that petitioner has failed to carry his burden of

showing that respondent erred in determining that Radcliffe was

required to withhold tax on the interest that it, in form, paid

to Bangkok Bank LA branch as part of the BB Loan No. 2 transaction.110 Accordingly, we sustain respondent's determinations that

(1) for the period that commenced on June 11, 1985, the date on

which BB Loan No. 2 was funded, and ended on September 12, 1986,
- 151 -

the date on which that loan was repaid, Radcliffe was required to

withhold tax on the full amount of the interest that it, in form,

paid to Bangkok Bank LA branch on BB Loan No. 2 and (2) petitioner, as transferee of Radcliffe, is liable for that withholding tax liability of Radcliffe.

3. BB Loan No. 3 Transaction

The record establishes that, in form, Bangkok Bank Ltd.

through its Los Angeles branch funded a $1,000,000 loan to

Radcliffe and held a $1,000,000 certificate of deposit in the

name of Double Wealth that secured that loan. The record also

shows that, in form, Bangkok Bank Ltd. through its Los Angeles

branch received interest from Radcliffe with respect to BB Loan

No. 3 and paid interest to Double Wealth on its $1,000,000 deposit.

Petitioner asserts, and respondent does not dispute, that

Bangkok Bank Ltd. through its Los Angeles branch had sufficient

funds to make BB Loan No. 3 to Radcliffe without having had the

Double Wealth $1,000,000 CD. Presumably Bangkok Bank Ltd.

through that same branch also had sufficient funds to pay interest on the Double Wealth $1,000,000 CD without its having received interest from Radcliffe with respect to BB Loan No. 3.

Nonetheless, we are satisfied from the record before us,

including (1) the relationships of (a) Bangkok Bank Ltd. and its

Los Angeles branch with petitioner, Mme. Koo, Radcliffe, and
- 152 -

Double Wealth and (b) petitioner with Mme. Koo and (2) the lack

of a nontax, business purpose for the form of the BB Loan No. 3

transaction, that Bangkok Bank Ltd. through its Los Angeles

branch (1) had a source (viz., the Double Wealth $1,000,000 CD)

for BB Loan No. 3 that it funded and (2) had a source (viz., the

interest paid by Radcliffe on BB Loan No. 3) for the interest it

paid on the Double Wealth $1,000,000 CD. Moreover, Bangkok Bank

Ltd. through its Los Angeles branch (1) had an inflow of funds

(viz., the Double Wealth $1,000,000 CD) that was sufficient to

cover its outflow of funds for BB Loan No. 3 and (2) had an

inflow of funds (viz., the interest paid by Radcliffe on BB Loan

No. 3) that was sufficient to cover its outflow of funds for the

interest paid on the Double Wealth $1,000,000 CD.

With respect to the nature of the relationships disclosed by

the record between the respective rates of interest on BB Loan

No. 3 and the Double Wealth $1,000,000 CD, the record establishes

that, throughout the period during which that loan was outstanding, the interest rate on that loan was set at .5 percent above

the corresponding interest rate on that certificate. In addition, petitioner acknowledges on brief that interest was payable

on BB Loan No. 3 by Radcliffe to Bangkok Bank Ltd. through its

Los Angeles branch on the same day of the month on which interest

was payable by that bank through that same branch on the certifi-
- 153 -

111 See supra note 109 for our views on petitioner's alleged

reason why the due dates for the payment of interest on the loan

and the deposit were made coextensive.

cate of deposit that, in form, secured that loan.111 Consequently, even though, as petitioner points out, Bangkok Bank Ltd.

through its Los Angeles branch could be considered to have

"owned" the interest that Radcliffe, in form, paid to it with

respect to BB Loan No. 3, the inflow of those interest payments

to it was matched in both amount (except for the .5 percent difference between the interest rate on that loan and the interest

rate on the certificate of deposit that, in form, secured that

loan) and time by the outflow of interest payments by it to

Double Wealth on the certificate of deposit that secured BB Loan

No. 3.

Turning to whether the Double Wealth $1,000,000 CD that

secured BB Loan No. 3 was applied to repay that loan, the record

discloses that that loan was repaid on September 12, 1986, with

the proceeds represented by that certificate of deposit.

Based on our examination of the entire record in these

cases, we find that petitioner has failed to carry his burden of

showing that respondent erred in determining that Radcliffe was

required to withhold tax on the interest that it, in form, paid

to Bangkok Bank LA branch as part of the BB Loan No. 3 transac-
- 154 -

112 See first paragraph supra note 108 for our views on petitioner's alternative argument about portfolio interest.

tion.112 Accordingly, we sustain respondent's determinations that

(1) for the period that commenced on November 12, 1985, the date

on which BB Loan No. 3 was funded, and ended on September 12,

1986, the date on which that loan was repaid, Radcliffe was

required to withhold tax on the full amount of the interest that

it, in form, paid to Bangkok Bank LA branch on BB Loan No. 3 and

(2) petitioner, as transferee of Radcliffe, is liable for that

withholding tax liability of Radcliffe.

4. UB $570,000 Pre-March 1984 Loan and 

UB $570,000 Renewed Loan Transactions

The record establishes that, in form, Union Bank funded a

$570,000 loan to BOT and Union Bank's affiliate Standard Chartered Bank HK held a deposit in the name of Merit that secured

that loan. With respect to the UB $570,000 renewed loan transaction, the record establishes that, in form, Union Bank renewed

its $570,000 loan to BOT and Union Bank's affiliate Standard

Chartered Bank, Singapore, held a deposit in the name of Forward

that secured that loan. The record also shows that, in form,

Union Bank received interest from BOT with respect to the UB

$570,000 pre-March 1984 and renewed loan transactions and, although the record is silent on this point, its affiliate Standard

Chartered Bank HK presumably paid interest to Merit on its

$570,000 deposit and its affiliate Standard Chartered Bank,
- 155 -

Singapore, presumably paid interest to Forward on its $570,000

deposit.

Petitioner asserts, and respondent does not dispute, that

Union Bank had sufficient funds to make the UB $570,000 pre-March

1984 loan to BOT without its affiliate Standard Chartered Bank HK

having had the Merit $570,000 deposit. Presumably Standard

Chartered Bank HK also had sufficient funds to pay interest on

the Merit $570,000 deposit without its affiliate Union Bank

having received interest from BOT with respect to the UB $570,000

pre-March 1984 loan. Nor does respondent dispute petitioner's

assertion that Union Bank had sufficient funds to renew the

$570,000 loan to BOT in March 1984 without its affiliate Standard

Chartered Bank, Singapore, having had the Forward $570,000 deposit. Presumably Standard Chartered Bank, Singapore, also had

sufficient funds to pay interest on the Forward $570,000 deposit

without its affiliate Union Bank having received interest from

BOT with respect to the UB $570,000 renewed loan. 

Nonetheless, we are satisfied from the record before us,

including (1) the relationships of (a) Union Bank and its affiliates Standard Chartered Bank HK and Standard Chartered Bank,

Singapore, with petitioner, Mme. Koo, BOT, Merit, and Forward and

(b) petitioner with Mme. Koo and (2) the lack of a nontax, business purpose for the form of the UB $570,000 pre-March 1984 and

renewed loan transactions, that Union Bank (1) through its affil-
- 156 -

iate Standard Chartered Bank HK had a source (viz., the Merit

$570,000 deposit) for the UB $570,000 pre-March 1984 loan and

(2) through its affiliate Standard Chartered Bank, Singapore, had

a source (viz., the Forward $570,000 deposit) for the UB $570,000

renewed loan that it funded. We are also satisfied from that record that (1) Standard Chartered Bank HK through its affiliate

Union Bank had a source (viz., the interest paid by BOT to Union

Bank on the UB $570,000 pre-March 1984 loan) for the interest it

presumably paid on the Merit $570,000 deposit and (2) Standard

Chartered Bank, Singapore, through its affiliate Union Bank had a

source (viz., the interest paid by BOT to Union Bank on the UB

$570,000 renewed loan) for the interest it presumably paid on the

Forward $570,000 deposit. Moreover, Union Bank (1) through its

affiliate Standard Chartered Bank HK had an inflow of funds

(viz., the Merit $570,000 deposit) that was sufficient to cover

its outflow of funds for the UB $570,000 pre-March 1984 loan to

BOT and (2) through its affiliate Standard Chartered Bank,

Singapore, had an inflow of funds (viz., the Forward $570,000

deposit) that was sufficient to cover its outflow of funds to

renew the UB $570,000 renewed loan to BOT. In addition, 

(1) Standard Chartered Bank HK through its affiliate Union Bank

had an inflow of funds (viz., the interest paid by BOT to Union

Bank on the UB $570,000 pre-March 1984 loan) that was sufficient

to cover its outflow of funds for the interest presumably paid on
- 157 -

113 The record does not disclose the interest rates applicable

to or the amounts of interest payable or paid on certain of the

deposits (viz., the Merit $570,000 deposit, the Forward $570,000

deposit, and the Forward $325,000 deposit) that served, in form,

as security for certain of the Union Bank loans at issue (viz.,

the UB $570,000 pre-March 1984 loan, the UB $570,000 renewed

loan, and the UB $325,000 loan, respectively). Nonetheless, we

find it reasonable to infer from the evidence in the record, in

particular the evidence relating to the transactions involving

the UB $800,000 Radcliffe loan, the UB $1,300,000 loan, and the

UB $1,830,000 loan, that the interest rates applicable to and the

amounts of interest payable or paid on those deposits were always

less than the percentage interest rates on and the amounts of

interest payable or paid on the respective loans that were, in

form, secured by those deposits.

the Merit $570,000 deposit and (2) Standard Chartered Bank,

Singapore, through its affiliate Union Bank had an inflow of

funds (viz., the interest paid by BOT to Union Bank on the UB

$570,000 renewed loan) that was sufficient to cover its outflow

of funds for the interest presumably paid on the Forward $570,000

deposit.113

Except as noted below with respect to the first renewal of

the UB $570,000 renewed loan, we cannot determine the nature of

the relationships, if any, between (a) the respective rates of

interest on the UB $570,000 pre-March 1984 loan and the Merit

$570,000 deposit and on the UB $570,000 renewed loan and the

Forward $570,000 deposit and (b) the respective dates on which

interest was payable or paid on those respective loans and deposits. This is because the record is inadequate. In this regard,

while the record shows certain facts relating to that inquiry

with respect to the UB $570,000 pre-March 1984 and renewed loan
- 158 -

114 We note that petitioner failed to produce certain documents

of Forward sought by respondent in discovery.

transactions (viz., certain of the interest rates and percentage

interest rates that were in effect for certain periods and certain of the dates on which interest was payable or paid on those

loans), the record does not disclose those facts with respect to

the Merit $570,000 deposit or the Forward $570,000 deposit.114

As for the first renewal of the UB $570,000 renewed loan,

the record establishes that the interest rate on that renewal was

linked to the interest rate on the Forward $570,000 deposit in

that the former was not to be less than 1 percent more than the

annualized effective interest rate on the latter.

Turning to whether the Merit $570,000 deposit and the Forward $570,000 deposit that secured the UB $570,000 pre-March 1984

loan and the UB $570,000 renewed loan, respectively, were applied

to repay those loans, the Merit $570,000 deposit was not applied

to repay the UB $570,000 pre-March 1984 loan. Instead, it was

replaced by the Forward $570,000 deposit that was to serve as

security for the UB $570,000 renewed loan. Although petitioner

claims on brief that BOT repaid the UB $570,000 renewed loan, the

record does not disclose (1) the identity of the person or persons who provided the funds that were used to repay it or 

(2) whether or not the Forward $570,000 deposit was so applied.

Based upon our examination of the entire record in these
- 159 -

115 See first paragraph supra note 108 for our views on petitioner's alternative argument about portfolio interest.

cases, and bearing in mind the substantial gaps in the evidence

with respect to the UB $570,000 pre-March 1984 and renewed loan

transactions, we find that petitioner has failed to carry his

burden of showing that respondent erred in determining that BOT

was required to withhold tax on the interest that it, in form,

paid to Union Bank as part of those transactions.115 Accordingly,

we sustain respondent's determinations that (1) for the period

that commenced on January 1, 1984, the first day of the years at

issue, and ended on July 10, 1986, the date on which the $570,000

loan to BOT was repaid, BOT was required to withhold tax on the

full amount of the interest that it, in form, paid to Union Bank

on the UB $570,000 pre-March 1984 loan and the UB $570,000 renewed loan, and (2) petitioner, as transferee of BOT, is liable for

that withholding tax liability of BOT.

5. UB $325,000 Loan Transaction

The record establishes that, in form, Union Bank funded a

$325,000 loan to Radcliffe and Union Bank's affiliate Standard

Chartered Bank HK held a deposit in the name of Forward that

secured that loan. The record also shows that, in form, Union

Bank received interest from Radcliffe with respect to the UB

$325,000 loan and, although the record is silent on this point,

its affiliate Standard Chartered Bank HK presumably paid interest
- 160 -

to Forward on its $325,000 deposit.

Petitioner asserts, and respondent does not dispute, that

Union Bank had sufficient funds to make the UB $325,000 loan to

Radcliffe without its affiliate Standard Chartered Bank HK having

had the Forward $325,000 deposit. Presumably Standard Chartered

Bank HK also had sufficient funds to pay interest on the Forward

$325,000 deposit without its affiliate Union Bank's having received interest from Radcliffe with respect to the UB $325,000

loan.

Nonetheless, we are satisfied from the record before us,

including (1) the relationships of (a) Union Bank and its affiliate Standard Chartered Bank HK with petitioner, Mme. Koo,

Radcliffe, and Forward and (b) petitioner with Mme. Koo and 

(2) the lack of a nontax, business purpose for the form of the UB

$325,000 loan transaction, that (1) Union Bank through its affiliate Standard Chartered Bank HK had a source (viz., the Forward

$325,000 deposit) for the UB $325,000 loan it funded and 

(2) Standard Chartered Bank HK through its affiliate Union Bank

had a source (viz., the interest paid by Radcliffe to Union Bank

on the UB $325,000 loan) for the interest it presumably paid on

the Forward $325,000 deposit. Moreover, (1) Union Bank through

its affiliate Standard Chartered Bank HK had an inflow of funds

(viz., the Forward $325,000 deposit) that was sufficient to cover

its outflow of funds for the UB $325,000 loan to Radcliffe and
- 161 -

116 See supra note 113.

(2) Standard Chartered Bank HK through its affiliate Union Bank

had an inflow of funds (viz., the interest paid by Radcliffe to

Union Bank on the UB $325,000 loan) that was sufficient to cover

its outflow of funds for the interest presumably paid on the

Forward $325,000 deposit.116

We cannot determine the nature of the relationships, if any,

between (a) the respective rates of interest on the UB $325,000

loan and the Forward $325,000 deposit and (b) the respective

dates on which interest was payable or paid on that loan and that

deposit. This is because the record is inadequate. In this regard, while the record shows certain facts relating to that

inquiry with respect to the UB $325,000 loan at issue (viz., certain of the interest rates and percentage interest rates that

were in effect for certain periods and certain of the dates on

which interest was payable or paid on that loan), the record does

not disclose those facts with respect to the Forward $325,000

deposit.

Turning to whether the Forward $325,000 deposit that secured

the UB $325,000 loan was applied to repay that loan, petitioner

claims on brief that Radcliffe repaid that loan. While the record does not disclose (1) the identity of the person or persons

who provided the funds to repay it or (2) whether or not the Forward $325,000 deposit was so applied, it does establish that the
- 162 -

117 See first paragraph supra note 108 for our views on petitioner's alternative argument about portfolio interest. 

funds used to repay the UB $325,000 loan were wired to Union Bank

from Standard Chartered Bank HK, the same affiliate of Union Bank

in which the Forward $325,000 deposit that secured that loan was

maintained. Thus, it appears reasonable to infer that the Forward $325,000 deposit could have been used to repay that loan,

and petitioner has not shown that that deposit was not so applied.

Based upon our examination of the entire record in these

cases, and bearing in mind the substantial gaps in the evidence

with respect to the UB $325,000 loan transaction, we find that

petitioner has failed to carry his burden of showing that respondent erred in determining that Radcliffe was required to withhold

tax on the interest that it, in form, paid to Union Bank as part

of that transaction.117 Accordingly, we sustain respondent's

determinations that (1) for the period that commenced in April

1984 on the date on which the UB $325,000 loan was funded and

ended on July 10, 1986, the date on which that loan was repaid,

Radcliffe was required to withhold tax on the full amount of the

interest that it, in form, paid to Union Bank on the UB $325,000

loan and (2) petitioner, as transferee of Radcliffe, is liable

for that withholding tax liability of Radcliffe.
- 163 -

118 The parties agree on brief that the Multi-Credit $800,000

deposit served as security for not only the UB $800,000 Radcliffe

loan but also the UB $800,000 NMSC loan that Radcliffe assumed.

6. UB $800,000 Radcliffe Loan Transaction

The record establishes that, in form, Radcliffe assumed an

$800,000 loan that Union Bank or one of its branches or predecessors in San Francisco had made to NMSC and initially Union Bank's

affiliate Standard Chartered Bank HK and thereafter Union Bank's

affiliate Standard Chartered Bank, Singapore, held a deposit in

the name of Multi-Credit that secured that assumed loan.118 The

record also shows that, in form, Union Bank received interest

from Radcliffe with respect to the UB $800,000 Radcliffe loan and

initially Standard Chartered Bank HK and thereafter Standard

Chartered Bank, Singapore, paid interest to Multi-Credit on its

$800,000 deposit.

Petitioner asserts, and respondent does not dispute, that

Union Bank or one of its branches or predecessors in San Francisco had sufficient funds to make the UB $800,000 NMSC loan that

was assumed by Radcliffe and to continue that loan after

Radcliffe assumed it without its affiliate Standard Chartered

Bank HK and thereafter its affiliate Standard Chartered Bank,

Singapore, having had the Multi-Credit $800,000 deposit. Presumably Standard Chartered Bank HK and thereafter Standard Chartered Bank, Singapore, also had sufficient funds to pay interest
- 164 -

on the Multi-Credit $800,000 deposit without their affiliate

Union Bank's having received interest from Radcliffe with respect

to the UB $800,000 Radcliffe loan.

Nonetheless, we are satisfied from the record before us,

including (1) the relationships of (a) Union Bank and its affiliates Standard Chartered Bank HK and Standard Chartered Bank,

Singapore, with petitioner, Mme. Koo, Radcliffe, and Multi-Credit

and (b) petitioner with Mme. Koo and (2) the lack of a nontax,

business purpose for the form of the UB $800,000 Radcliffe loan

transaction, that Union Bank through its affiliate Standard Chartered Bank HK and thereafter its affiliate Standard Chartered

Bank, Singapore, had a source (viz., the Multi-Credit $800,000

deposit) for the UB $800,000 NMSC loan that it or one of its

branches or predecessors in San Francisco funded and that was

assumed by Radcliffe. We are also satisfied from that record

that Standard Chartered Bank HK and thereafter Standard Chartered

Bank, Singapore, through their affiliate Union Bank had a source

(viz., the interest paid by Radcliffe to Union Bank on the UB

$800,000 Radcliffe loan) for the interest they paid on the MultiCredit $800,000 deposit. Moreover, Union Bank through its affiliate Standard Chartered Bank HK and thereafter its affiliate

Standard Chartered Bank, Singapore, had an inflow of funds (viz.,

the Multi-Credit $800,000 deposit) that was sufficient to cover
- 165 -

119 The record does not show that relationship, if any, for the

brief period that began on July 10, 1986, the date on which the

loan was due, and ended on July 23, 1986, the date on which that

loan was repaid.

its outflow of funds for the UB $800,000 NMSC loan that was

assumed by Radcliffe. In addition, Standard Chartered Bank HK

and thereafter Standard Chartered Bank, Singapore, through their

affiliate Union Bank had an inflow of funds (viz., the interest

paid by Radcliffe to Union Bank on the UB $800,000 Radcliffe

loan) that was sufficient to cover their outflow of funds for the

interest paid on the Multi-Credit $800,000 deposit.

With respect to the nature of the relationship disclosed by

the record between the respective rates of interest on the UB

$800,000 Radcliffe loan and the Multi-Credit $800,000 deposit,119

the record establishes that, for the period that began on or

about June 27, 1985, the date on which Radcliffe assumed the

$800,000 loan that Union Bank or one of its branches or predecessors in San Francisco had made to NMSC, and ended on July 10,

1986, the date on which the UB $800,000 Radcliffe loan was due,

the excess of the percentage interest rates on that loan over the

corresponding interest rates on the Multi-Credit $800,000 deposit

that secured that loan ranged from approximately 2 percent to 3.5

percent. We note that that range of difference appears to be

substantial when considered in relation to the range of percentage interest rates on the UB $800,000 Radcliffe loan (viz., 10.14

percent to 10.91 percent) and the range of the interest rates on
- 166 -

120 We also note that the differences disclosed by the record

between the percentage interest rates on the UB $800,000

Radcliffe loan over the corresponding interest rates on the

Multi-Credit $800,000 deposit that secured that loan were larger

than any of the differences disclosed by the record between the

actual interest rate percentages on each of certain other loans

at issue and the interest rates on each of certain deposits that

secured them (viz., .5 percent with respect to BB Loan Nos. 2 and

3 and 1.15 percent with respect to the UB $1,300,000 and

$1,830,000 loans).

121 The record does not show that relationship, if any, for the

brief period that commenced on July 10, 1986, and ended on July

23, 1986. See supra note 119.

the Multi-Credit $800,000 deposit (viz., 6.875 percent to 8

percent).120

With respect to the nature of the relationship disclosed by

the record between the respective dates on which interest was

payable or paid on the UB $800,000 Radcliffe loan and the MultiCredit $800,000 deposit that secured that loan,121 the record establishes that, for the period that began on or about June 27,

1985, the date on which Radcliffe assumed the $800,000 loan that

Union Bank or one of its branches or predecessors in San Francisco had made to NMSC, and ended on July 10, 1986, the date on

which the UB $800,000 Radcliffe loan was due, (1) 11 of the dates

on which interest was payable on the Multi-Credit $800,000 deposit were the same or nearly the same or occurred, at most, one

week before the dates on which interest was payable on the UB

$800,000 Radcliffe loan, and (2) four of the dates on which

interest was payable on that deposit occurred, at most, 13 days

before the dates on which interest was payable on that loan. 
- 167 -

At first blush, the differences disclosed by the record

between the percentage interest rates on the UB $800,000

Radcliffe loan and the corresponding interest rates on the MultiCredit $800,000 deposit and the differences in the dates, at

least the differences exceeding one week, between the respective

dates on which interest was payable on that loan and that deposit

might appear to be factors supporting petitioner's position that

the UB $800,000 Radcliffe loan was, in substance, from Union Bank

to Radcliffe. However, we are unwilling to give any particular

weight to any of those differences, especially when we take into

account (1) that Union Bank and its affiliates Standard Chartered

Bank HK and Standard Chartered Bank, Singapore, desired to accommodate, and were susceptible to influence by, petitioner, Mme.

Koo, Radcliffe, and Multi-Credit and (2) petitioner's failure to

establish a nontax, business purpose for the form of the UB

$800,000 Radcliffe loan transaction.

Turning to whether the Multi-Credit $800,000 deposit that

secured the UB $800,000 Radcliffe loan was applied to repay that

loan, petitioner claims on brief that Radcliffe repaid that loan. 

However, the record does not disclose (1) the identity of the

person or persons who provided the funds that were used to repay

it or (2) whether or not the Multi-Credit $800,000 deposit was so

applied.

Based upon our examination of the entire record in these

cases, we find that petitioner has failed to carry his burden of
- 168 -

122 As noted above, respondent's concession that a loan, in

fact, was made to Radcliffe or BOT, as the case may be, extends

to all the loan transactions at issue. Petitioner alleges on

brief, respondent disputes, and the evidence in the record does

not reliably establish that the UB $1,300,000 loan was used to

repay a loan to Radcliffe that Pioneer had previously made.

showing that respondent erred in determining that Radcliffe was

required to withhold tax on the interest that it, in form, paid

to Union Bank as part of the UB $800,000 Radcliffe loan transaction. Accordingly, we sustain respondent's determinations that

(1) for the period that commenced on or about June 27, 1985, the

date on which Radcliffe assumed the $800,000 loan that Union Bank

or one of its branches or predecessors in San Francisco had made

to NMSC, and ended on July 23, 1986, the date on which that loan

was repaid, Radcliffe was required to withhold tax on the full

amount of the interest that it, in form, paid to Union Bank on

the UB $800,000 Radcliffe loan and (2) petitioner, as transferee

of Radcliffe, is liable for that withholding tax liability of

Radcliffe.

7. UB $1,300,000 Loan Transaction

Respondent concedes that a loan, in fact, was made to

Radcliffe in the UB $1,300,000 loan transaction.122 Thus, as she

acknowledges on brief, "The only issue here is the identity of

the lender." It is petitioner's position that the lender in that

transaction was Union Bank. It is respondent's position that the

lender was initially Pioneer and thereafter Mandalay, the foreign

corporations pledging collateral for the UB $1,300,000 loan. The
- 169 -

123 As noted above, respondent advances the same rationale for

her position regarding all the loan transactions at issue.

124 We shall not explore, for example, under substance over form

and related principles whether a loan, in fact, was made to

Radcliffe.

reason respondent espouses for her position is that those corporations "were the ultimate source of the loans to * * *

Radcliffe."123

Proceeding from and constrained by respondent's concession

that a loan, in fact, was made to Radcliffe in the UB $1,300,000

loan transaction, we limit our inquiry to a determination of the

identity of the lender.124 The record establishes that, in form,

Union Bank funded the UB $1,300,000 loan to Radcliffe and that,

at the direction of petitioner and Ms. Gaw on behalf of

Radcliffe, the proceeds of that loan were used to purchase initially the Pioneer $1,300,000 CD and thereafter the Mandalay

$1,300,000 CD that secured that loan. Thus, neither Pioneer nor

Mandalay funded the certificates of deposit that were pledged to

secure the UB $1,300,000 loan. Consequently, neither of those

foreign corporations could have been, in the words of respondent,

"the ultimate source" of the UB $1,300,000 loan to Radcliffe.

Based upon our examination of the entire record in these

cases, and bearing in mind respondent's concession that a loan

was, in fact, made to Radcliffe in the UB $1,300,000 transaction,

we reject respondent's determination that the interest that

Radcliffe paid on that loan was subject to withholding tax.
- 170 -

125 Petitioner testified, respondent disputes, and the evidence

in the record does not reliably establish that the UB $1,830,000

loan was used to repay a loan to BOT that Pempire had previously

made.

8. UB $1,830,000 Loan Transaction

Respondent concedes that a loan, in fact, was made to BOT in

the UB $1,830,000 loan transaction125 and acknowledges on brief

that the identity of the lender is the only issue presented here. 

It is petitioner's position that the lender in that transaction

was Union Bank. It is respondent's position that the lender was

Pempire, the foreign corporation pledging collateral for the UB

$1,830,000 loan, because that corporation was "the ultimate

source of the loans to BOT".

Proceeding from and constrained by respondent's concession

that a loan, in fact, was made to BOT in the UB $1,830,000 loan

transaction, we limit our inquiry to a determination of the

identity of the lender. The record establishes that, in form,

Union Bank funded the UB $1,830,000 loan to BOT and that, at the

direction of petitioner on behalf of BOT, the proceeds of that

loan were used to purchase the Pempire $1,830,000 CD that secured

that loan. Thus, Pempire did not fund the certificate of deposit

that was pledged to secure the UB $1,830,000 loan. Consequently,

Pempire could not have been, in the words of respondent, "the

ultimate source" of the UB $1,830,000 loan to BOT.

Based upon our examination of the entire record in these

cases, and bearing in mind respondent's concession that a loan
- 171 -

126 Probability and notions of social and economic policy are

two of the factors listed and discussed in 1 Weinstein & Berger,

Weinstein's Evidence, par. 300[02], at 300-7 to 300-8 (1995),

which petitioner cites on brief, that courts have considered in

deciding whether to create a presumption under rule 301 of the

Federal Rules of Evidence.

was, in fact, made to BOT in the UB $1,830,000 loan transaction,

we reject respondent's determination that the interest that BOT

paid on that loan was subject to withholding tax.

B. Horbury Transaction

Petitioner argues that the interest paid by BOT that is at

issue in the Horbury transaction is exempt from U.S. taxation

under article VIII(1) of the U.S.-Netherlands treaty (article

VIII(1)). Article VIII(1) provides:

Interest on bonds, notes, debentures, securities,

deposits or any other form of indebtedness (including

interest from mortgages or bonds secured by real property) paid to a resident or corporation of one of the

Contracting States shall be exempt from tax by the

other Contracting State.

In advancing his position, petitioner contends that this

Court should create a presumption under rule 301 of the Federal

Rules of Evidence that the interest at issue in the Horbury

transaction is exempt from U.S. taxation under article VIII(1). 

To support that contention, petitioner asserts that, under the

circumstances relating to the Horbury transaction that he alleges

are present here, "Probability and notions of social and economic

policy,[126] i.e., the unfairness of applying the conduit doctrine

retroactively nine years after the event, when records are unavailable, justify the creation of a presumption here."
- 172 -

127 The only such allegations that are established by reliable

evidence in the record are that Horbury was organized in the

Netherlands in 1982 and that it was a third-tier subsidiary of

Pioneer.

128 Petitioner claimed at trial that even though (1) Horbury was

(continued...)

The circumstances on which petitioner relies in support of

his position for the creation of a presumption under rule 301 of

the Federal Rules of Evidence include his allegations that 

(1) Horbury was organized in the Netherlands in 1982 at the

direction of S.C. Gaw, petitioner's father; (2) San Francisco

counsel was employed by S.C. Gaw for that purpose; (3) Horbury

was a third-tier subsidiary of Pioneer; (4) the Horbury loan to

BOT was made before S.C. Gaw's death in October 1983; (5) petitioner was not responsible for the Horbury loan; (6) petitioner

did not handle Horbury's day-to-day accounting; (7) petitioner

did not know what happened to the interest at issue after BOT

paid it to Horbury; (8) petitioner furnished respondent with all

records concerning Horbury and the Horbury loan that were within

his possession, custody, and control; and (9) Horbury was liquidated in 1986 or 1987.

We note first that we are not willing to accept as facts

most of the foregoing allegations relied on by petitioner.127

This is because most of them are based wholly on petitioner's

testimony that we found to be vague, conclusory, or evasive on

those points. Moreover, based on our observation of his demeanor

at trial, we generally did not find him to be credible.128
- 173 -

128(...continued)

a subsidiary of Pioneer during the years at issue and (2) Pioneer

was a public corporation, Horbury's records were in his father's

files, and those files were in the control of his mother and

siblings who refused to talk to him, let alone provide those

files to him, because of a hostile family relationship. We note

that petitioner was able to obtain from his mother and siblings

at least one document from his father's files (viz., a letter to

S.C. Gaw from Mr. Catterton) that he introduced into evidence in

an attempt to support his position in these cases. In any event,

even if we were to accept petitioner's testimony concerning his

inability to obtain Horbury's records, that inability would

affect only the type of evidence that petitioner could have

presented in support of his claim. See Malinowski v. Commissioner, 71 T.C. 1120, 1124-1125 (1979). Petitioner did not offer

credible secondary evidence concerning the Horbury transaction.

Having analyzed the factors considered by courts in deciding

whether to create a presumption under rule 301 of the Federal

Rules of Evidence that are relied upon by petitioner, we conclude

that creation of such a presumption is not warranted or appropriate under the circumstances presented in these cases. Thus,

petitioner has the burden of going forward with evidence to show

that respondent erred in determining that BOT was required to

withhold tax on the interest at issue in the Horbury transaction.

Turning to the merits of petitioner's position with respect

to the Horbury transaction, petitioner appears to advance two

principal contentions to support his argument that the interest

at issue in the Horbury transaction is exempt from U.S. taxation

under article VIII(1). He first contends that that interest is

exempt under that article because it was paid to a corporation

organized in the Netherlands, viz., Horbury, and therefore the

express provisions of that article have been satisfied.
- 174 -

129 Rev. Rul. 95-56, 1995-36 I.R.B. 20, renders Rev. Ruls. 85-

163, 1985-2 C.B. 349, 84-152, 1984-2 C.B. 381, and 84-153, 1984-2

C.B. 383, obsolete for payments made after Sept. 10, 1995, that

are subject to the final regulations under sec. 7701(l), T.D.

8611, 60 Fed. Reg. 40997 (Aug. 11, 1995). 

130 Petitioner's contention presumes that Rev. Ruls. 84-152,

supra, and 84-153, supra, apply to the interest at issue in the

Horbury transaction. We have not relied upon those revenue

rulings in reaching our holdings with respect to the Horbury

transaction. Rather, we have relied upon the substance over form

doctrine, the facts and circumstances disclosed by the record,

and petitioner's failure of proof. 

Petitioner appears to contend further that the interest at

issue in the Horbury transaction is exempt from U.S. taxation under article VIII(1) because it qualifies for the grandfathering

provided by Rev. Rul. 85-163, 1985-2 C.B. 349.129 In that ruling,

the Commissioner announced that the holdings of Rev. Rul. 84-152,

1984-2 C.B. 381, and Rev. Rul. 84-153, 1984-2 C.B. 383, are not

to be applied to interest payments made in connection with, inter

alia, debt obligations issued prior to October 15, 1984.130 In

Rev. Rul. 84-152, supra, the Service concluded that, where 

(1) the foreign parent of a controlled group of corporations lent

funds to its wholly owned Netherlands Antilles subsidiary, 

(2) that subsidiary relent those funds to a wholly owned domestic

subsidiary of that parent, and (3) the Netherlands Antilles

subsidiary was a conduit for the passage of interest payments by

that domestic subsidiary to its foreign parent, those interest

payments were not exempt from U.S. taxation under the U.S.-Netherlands treaty as extended to the Netherlands Antilles. In Rev.

Rul. 84-153, supra, the Service concluded that, where (1) a
- 175 -

wholly owned Netherlands Antilles subsidiary of a domestic parent

of a controlled group of corporations sold bonds to foreign

persons in public offerings outside the United States, (2) the

Netherlands Antilles subsidiary lent the proceeds of the bond

sale to a wholly owned domestic subsidiary of that parent, and

(3) the Netherlands Antilles subsidiary was a conduit for the

passage of interest payments by that domestic subsidiary to the

foreign bondholders, those interest payments were not exempt from

U.S. taxation under the U.S.-Netherlands treaty as extended to

the Netherlands Antilles.

With respect to petitioner's contention that the interest at

issue in the Horbury transaction is exempt from U.S. taxation

under article VIII(1) because the express provisions of that

article have been satisfied, it is respondent's position that

petitioner has not satisfied his burden of proving that that

interest is so exempt. To support that position, respondent

relies on the substance over form doctrine and related principles, which this Court applied in Aiken Indus., Inc. v. Commissioner, 56 T.C. at 933-934. Although respondent concedes that a

loan, in fact, was made to BOT in the Horbury transaction, she

contends that, in substance, Pioneer, rather than Horbury, was

the lender and the interest paid by BOT was paid to Pioneer, and

not to Horbury.

With respect to petitioner's contention that the interest at

issue in the Horbury transaction is exempt from U.S. taxation
- 176 -

131 Respondent seems to agree with petitioner that if the

Horbury loan were to qualify for the grandfathering afforded by

Rev. Rul. 85-163, supra, the interest at issue in the Horbury

transaction would be exempt from U.S. taxation under article

VIII(1).

under article VIII(1) because it qualifies for the grandfathering

provided by Rev. Rul. 85-163, supra, it is respondent's position

that petitioner has not satisfied his burden of proving that that

interest so qualifies.131

Turning to petitioner's contention that the interest at

issue in the Horbury transaction is exempt from U.S. taxation under article VIII(1) because the express provisions of that article have been satisfied, we agree with respondent that, under

substance over form and related principles, which we applied in

Aiken Indus., Inc. v. Commissioner, 56 T.C. at 933-934, the

question whether a payment of interest is exempt from U.S. taxation under the provisions of a treaty is determined by the substance, rather than the form, of the transaction with respect to

which such a payment is made. The record in these cases is devoid of reliable evidence that would enable us to determine

whether or not the form of the Horbury loan to BOT reflected its

substance. We therefore cannot conclude that the interest at

issue in the Horbury transaction was, in substance, paid to

Horbury, as petitioner contends. On the instant record, we find

that petitioner has failed to satisfy his burden of showing that

that interest is exempt from U.S. taxation under article VIII(1)
- 177 -

132 The only reliable evidence in the record relevant to determining when the Horbury loan was made is inconclusive. The

parties stipulated that BOT claimed a deduction of $151,722 in

its 1984 income tax return for interest it paid to Horbury. The

record does not contain reliable evidence showing whether or not

any of that interest was paid prior to Oct. 15, 1984, and therefore the payment of that interest does not indicate whether or

not the Horbury loan was made prior to that date. It would be

unfortunate if, in fact, the Horbury loan had been made prior to

Oct. 15, 1984, and thus would have qualified for the grandfathering provided by the Commissioner in Rev. Rul. 85-163, 1985-2 C.B.

349. However, the instant cases are no different from any other

case in which a taxpayer fails to satisfy his or her burden of

proof through credible evidence.

because the express provisions of that article have been satisfied.

We now turn to petitioner's contention that the interest at

issue in the Horbury transaction is exempt from U.S. taxation under article VIII(1) because it qualifies for the grandfathering

provided by Rev. Rul. 85-163, supra, with respect to interest

payments on, inter alia, debt obligations issued prior to October

15, 1984. To support that suggestion, petitioner relies on his

testimony that the Horbury loan was made prior to S.C. Gaw's

death in October 1983. For the reasons previously stated herein,

we do not find that testimony to be credible. We therefore are

unwilling to accept it. Accordingly, petitioner has not established that the Horbury loan was made prior to October 15,

1984.132 Consequently, he has failed to satisfy his burden of

showing that the interest at issue that was paid with respect to

that loan is exempt from U.S. taxation under article VIII(1)

because it qualifies for the grandfathering provided by Rev. Rul.
- 178 -

133 Respondent also contends that petitioner may show error in

her determination with respect to the interest at issue in the

Horbury transaction by demonstrating that that interest qualifies

for the grandfathering provided by sec. 127(g)(3) of the Deficit

Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 652-653, which

protects certain CFC's involved in specified types of financing

transactions from being recharacterized as conduits in those

transactions. On brief, petitioner has abandoned any reliance on

the grandfathering afforded by that provision. In any event, he

has not shown by reliable evidence that the requirements of sec.

127(g)(3) of the Deficit Reduction Act of 1984 have been satisfied.

85-163, 1985-2 C.B. 349.133

Based upon our examination of the entire record in these

cases, and bearing in mind the dearth of evidence with respect to

the Horbury transaction, we find that petitioner has failed to

carry his burden of showing that respondent erred in determining

that BOT was required to withhold tax on the interest that it, in

form, paid to Horbury in 1984 as part of that transaction. Accordingly, we sustain respondent's determination that (1) for

1984, BOT was required to withhold tax on the full amount of the

interest that it, in form, paid to Horbury with respect to the

Horbury transaction and (2) petitioner, as transferee of BOT, is

liable for that withholding tax liability of BOT.

VI. Petitioner's Constitutional and

Abuse of Discretion Claims 

Having sustained respondent's determinations to the extent

stated herein with respect to the transactions at issue, we

consider petitioner's claims that respondent violated his right

to equal protection of the law under the Fifth Amendment to the
- 179 -

134 Although the determinations that petitioner claims on brief

were the result of respondent's unconstitutional conduct were

made with respect to Radcliffe and BOT, he contends that those

determinations violated his right to equal protection of the law

under the Fifth Amendment, rather than any constitutional rights

of Radcliffe and BOT. Accordingly, we address petitioner's

constitutional claim on the terms in which he has framed it.

135 Rev. Rul. 95-56, 1995-36 I.R.B. 20, rendered Rev. Rul. 87-

89, 1987-2 C.B. 195, situations (1) and (2), obsolete for payments made after Sept. 10, 1995, that are subject to the final

regulations under sec. 7701(l), T.D. 8611, 60 Fed. Reg. 40997

(Aug. 11, 1995).

136 We do not understand petitioner to argue that, and therefore

we do not consider whether, respondent violated petitioner's

right to equal protection of the law under the Fifth Amendment

and abused her discretion by determining the deficiencies at

issue with respect to the Horbury transaction. In any event,

petitioner has not shown that respondent violated the Fifth

Amendment or abused her discretion in making her determinations

regarding that transaction.

Constitution (Fifth Amendment)134 and abused her discretion by

determining under Rev. Rul. 87-89, 1987-2 C.B. 195, situations

(1) and (2),135 that the interest at issue in the Bank transactions involved herein was, in substance, paid by Radcliffe and

BOT, respectively, to one or more of the foreign corporations

pledging collateral and that therefore such interest was subject

to withholding tax under section 1442(a) by those two companies.136 Petitioner presumably contends, although he does not

explicitly argue, that if we were to sustain his constitutional

and/or abuse of discretion claims, we would reject respondent's

determinations relating to the Bank transactions involved in

these cases.

In Rev. Rul. 87-89, supra, the Service purported to rely on
- 180 -

137 A revenue ruling merely represents the Commissioner's position with respect to a specific factual situation and does not

constitute substantive authority for deciding a case in this

Court. Stark v. Commissioner, 86 T.C. 243, 250-251 (1986).

the substance over form doctrine that was first enunciated in

Gregory v. Helvering, 293 U.S. 465 (1935), when it concluded,

inter alia, that, where (1) funds denominated as a demand deposit

were, in form, deposited into a publicly held bank by a foreign

member of a controlled group of corporations, (2) a loan was

made, in form, by that bank to a domestic member of that group,

(3) the loan would not have been made or maintained on the same

terms without the deposit, and (4) the bank was publicly held and

unrelated to the controlled group, such a transaction will be

treated as, in substance, a loan from the foreign member of the

controlled group of corporations to the domestic member of that

group.

Before turning to the parties' contentions regarding Rev.

Rul. 87-89, supra, we note that we have not applied or relied

upon that ruling in making our findings or in reaching our holdings in these cases.137 We have applied and relied upon the

substance over form doctrine on which the Service purported to

rely in reaching its conclusion in Rev. Rul. 87-89, supra. 

In advancing his constitutional and abuse of discretion

claims, petitioner contends that this Court should create a

presumption under rule 301 of the Federal Rules of Evidence that

respondent's determinations were the result of her unconstitu-
- 181 -

tional and/or otherwise improper selective enforcement of the tax

laws against petitioner, Radcliffe, and BOT. To support that

contention, petitioner asserts that, under the circumstances

relating to those determinations that he alleges on brief are

present here, all of the factors discussed in 1 Weinstein &

Berger, Weinstein's Evidence, par. 300[02], at 300-7 to 300-8

(1995), favor creation of such a presumption. Petitioner offers

no analysis of those factors or of their application, if any, to

the facts and circumstances presented in these cases.

The circumstances on which petitioner relies in support of

his position for the creation of a presumption under rule 301 of

the Federal Rules of Evidence include his allegations on brief

that (1) the back-to-back loan transaction involved in Rev. Rul.

87-89, supra, was, and the National Office of the Service was

aware that it was, commonplace at the time that ruling was issued; (2) although the retroactive effect of that ruling was not

limited by the Commissioner under section 7805(b), the general

administrative practice of the Service was to apply it prospectively only; and (3) respondent's examining agent who proposed

the deficiencies relating to the Bank transactions bore personal

animosity toward petitioner.

We note first that, for the reasons discussed below, we are

not willing to accept as facts the allegations on brief on which

petitioner relies in support of his contention that this Court

should create a presumption that respondent's determinations in
- 182 -

138 Although the Fifth Amendment contains no equal protection

clause, its due process guarantees incorporate similar principles. Nationalist Movement v. Commissioner, 102 T.C. 558, 594

(1994), affd. 37 F.3d 216 (5th Cir. 1994).

the notices involving the Bank transactions were the result of

her unconstitutional and/or otherwise improper selective enforcement of the tax laws against him, Radcliffe, and BOT. Nonetheless, we have analyzed the various factors relied on by petitioner in advancing that contention. Under the circumstances

presented here, we conclude that creation of such a presumption

under rule 301 of the Federal Rules of Evidence is not warranted

or appropriate. Thus, petitioner has the burden of going forward

with evidence to establish that respondent's determinations in

the notices involving the Bank transactions violated his Fifth

Amendment rights and/or constituted an abuse of discretion by

respondent.

A. Petitioner's Constitutional Claim

Petitioner alleges on brief that respondent's determinations

with respect to the Bank transactions resulted from her selective

enforcement of the tax laws and that, consequently, respondent

has violated his constitutional right to equal protection of the

law under the Fifth Amendment.138 To prevail on such an allegation, petitioner must show (1) that he was singled out for audit

and deficiency determination while others similarly situated were

not and (2) that respondent's selection of him was based upon

constitutionally impermissible considerations such as race,
- 183 -

religion, or the desire to prevent the exercise of his constitutional rights. See Argabright v. United States, 35 F.3d 472, 477

(9th Cir. 1994); St. German of Alaska E. Orthodox Catholic Church

v. United States, 840 F.2d 1087, 1095 (2d Cir. 1988); Karme v.

Commissioner, 673 F.2d 1062, 1064 (9th Cir. 1982), affg. 73 T.C.

1163 (1980); Penn-Field Indus., Inc. v. Commissioner, 74 T.C.

720, 723 (1980).

This Court has on numerous occasions described our responsibility in cases before us. We have described that responsibility as follows:

It is the well-established position of this Court that

our responsibility is to apply the law to the facts of

the case before us and to determine the correct tax

liability of the petitioner. How the Commissioner may

have treated other taxpayers generally has been considered irrelevant in reaching our decision. See Davis

v. Commissioner, 65 T.C. 1014, 1022 (1976), and the

cases cited therein; Teichgraeber v. Commissioner, 64

T.C. 453 (1975). It is conceivable, however, that

there may be situations where a taxpayer should be

accorded some relief if he were selected for audit on a

constitutionally impermissible criterion, although such

situations are extremely rare. Greenberg's Express,

Inc. v. Commissioner, 62 T.C. 324, 328 (1974). [PennField Indus., Inc. v. Commissioner, supra at 722.]

1. Petitioner's Claim That He Was Singled Out

In support of his claim that he was singled out by respondent when she made the determinations with respect to the Bank

transactions at issue, petitioner contends that (1) the back-toback loan transaction involved in Rev. Rul. 87-89, 1987-2 C.B.

195, was, and the National Office was aware that it was, commonplace at the time that ruling was issued; (2) although the
- 184 -

139 To establish his contention that the back-to-back loan

transaction involved in Rev. Rul. 87-89, 1987-2 C.B. 195, was

commonplace at the time that ruling was issued, petitioner relies

upon the newspaper article in the Financial Times and the August

1987 memorandum prepared by an attorney in the National Office

that, for the reasons discussed above, we have not admitted into

evidence.

 To establish his contention that the National Office was aware

that the back-to-back loan transaction analyzed in Rev. Rul. 87-

89, supra, was commonplace, petitioner relies on the August 1987

memorandum. As discussed above, we have not admitted the August

1987 memorandum into evidence for that purpose.

retroactive effect of that ruling was not limited by the Commissioner under section 7805(b), the general administrative practice

of the Service was to apply it prospectively only; and (3) respondent's examining agent who proposed the deficiencies relating

to the Bank transactions bore personal animosity toward petitioner. Respondent denies petitioner's contentions.

We find on the record before us that petitioner has not established the allegations on brief that form the basis of his

first contention (viz., the back-to-back loan transaction involved in Rev. Rul. 87-89, supra, was, and the National Office of

the Service was aware that it was, commonplace at the time that

ruling was issued).139 Even assuming arguendo that those allegations were established by the record herein, they would not cause

us to conclude that respondent singled out petitioner for audit

and deficiency determination while others similarly situated were

not.
- 185 -

The Commissioner is not required to exercise her discretion

under section 7805(b) to limit the retroactive application of a

revenue ruling solely because it may apply to a type of transaction that is, and that the Service knows is, commonplace. If the

Commissioner decides not to exercise her authority to limit the

retroactive effect of a revenue ruling, she generally has an

obligation to apply the ruling retroactively to all similarly

situated taxpayers. Petitioner has the burden of showing that

the Commissioner failed to apply Rev. Rul. 87-89, supra, retroactively to all similarly situated taxpayers or that he otherwise

was singled out by respondent.

With respect to petitioner's second contention (viz., the

Service's general administrative practice was to apply Rev. Rul.

87-89, supra, on a prospective basis only), except for the

present cases, the only instance of the application of that

ruling disclosed by the record is Fu Inv. Co. v. Commissioner,

docket No. 13306-92. In this connection, the parties entered

into the following stipulation:

After making reasonable inquiry of the Office of Associate Chief Counsel (International), the Office of the

Assistant Commissioner (International), the Office of

Western Regional Counsel, and the San Francisco District Office, respondent has not discovered any unagreed case in the Examination Division or docketed

case other than these cases and the case of Fu Investment Company v. Commissioner, Docket No. 13306-92, in

which Rev. Rul. 87-89 has been applied retroactively. 

* * *
- 186 -

140 We are not persuaded by the examining agent's acknowledgment

at trial that he previously had indicated that "rich people from

Hong Kong undermine the U.S. tax system" that that agent harbored

personal animosity toward petitioner.

141 We note that petitioner does not suggest that personal animosity played a role in the determination of the deficiencies at

issue in Fu Inv. Co. v. Commissioner, docket No. 13306-92. The

(continued...)

As we understand petitioner's position, he asks us to infer

from the foregoing stipulation the existence of a policy by the

Service of applying Rev. Rul. 87-89, supra, on a prospective

basis only. We decline to draw any such inference. We also note

that there are other inferences that may be drawn from the parties' stipulation. For example, there may have been other cases

pending in respondent's examination division and/or in the courts

of which the offices of respondent specified in that stipulation

were aware, but as to which the parties there involved reached

agreement, and therefore such cases were no longer unagreed or

docketed.

With respect to petitioner's third contention (viz., respondent's examining agent who proposed the deficiencies relating to

the Bank transactions bore personal animosity toward petitioner),

the record does not establish that that agent harbored any personal animosity toward petitioner.140 Even assuming arguendo that

such animosity were shown by the record, petitioner has not

demonstrated that it was the basis for the determinations in the

notices.141 While the agent admitted in his testimony that he
- 187 -

141(...continued)

parties have stipulated that the deficiencies in that case are

based upon deficiencies in withholding tax proposed by the same

examining agent who proposed the deficiencies in withholding tax

that form the bases for the notices herein.

previously stated that "rich people from Hong Kong undermine the

U.S. tax system", he further testified that he proposed the

deficiencies that became the bases for the notices because he

believed that such proposed deficiencies were required by the

substance over form doctrine and Rev. Rul. 87-89, 1987-2 C.B.

195. We have no reason to question the examining agent's credibility, and, in fact, we found him to be totally credible and

candid.

Based on our review of the entire record before us, we find

that petitioner has not established that he was singled out by

respondent for audit and deficiency determination while others

similarly situated were not.

2. Petitioner's Claim That He Was Singled Out 

Based on Constitutionally Impermissible Grounds

Even assuming arguendo that petitioner had shown that he was

singled out, that showing, standing alone, would not have justified our holding that he was denied equal protection of the law

under the Fifth Amendment. In this connection, we have had

occasion to observe that

the Supreme Court has held that the conscious exercise

of some selectivity in enforcement is not in itself a

Federal constitutional violation of due process or
- 188 -

equal protection where the selection was not deliberately based upon an unjustifiable standard such as

race, religion, or other arbitrary classification. 

Oyler v. Boles, 368 U.S. 448 (1962). [Penn-Field

Indus., Inc. v. Commissioner, 74 T.C. at 722-723.]

Although petitioner alleges on brief that the examining

agent who proposed the deficiencies that form the bases for the

notices herein was "personally biased against 'rich people from

Hong Kong'" who he believed "all cheated", he does not argue that

that allegation (or any other alleged fact) establishes that he

was singled out based on a constitutionally impermissible ground.

Based on our review of the entire record before us, and

assuming arguendo that petitioner had shown that he was singled

out for audit and deficiency determination while others similarly

situated were not, we find that he has not established that

respondent's selection of him was based upon a constitutionally

impermissible ground.

* * *

On the record in the instant cases, we reject petitioner's

contention that respondent's determination of the deficiencies in

these cases relating to the Bank transactions constituted a

denial of his right to equal protection of the law under the

Fifth Amendment. See Nationalist Movement v. Commissioner, 102

T.C. 558, 595 (1994), affd. 37 F.3d 216 (5th Cir. 1994); PennField Indus., Inc. v. Commissioner, 74 T.C. at 723-724.
- 189 -

142 We note that petitioner's claim that respondent abused her

discretion appears to be inconsistent with his constitutional

claim that, despite respondent's general administrative practice

of applying Rev. Rul. 87-89, 1987-2 C.B. 195, on a prospective

basis only, that ruling was applied retroactively to the Bank

transactions. In any event, we addressed and rejected above

petitioner's constitutional claim.

B. Petitioner's Abuse of Discretion Claims

1. Petitioner's Claim That Rev. Rul. 87-89

Should Not Be Applied Retroactively 

Petitioner contends that respondent's retroactive application of Rev. Rul. 87-89, supra, to taxpayers generally, including

specifically Radcliffe and BOT, constituted an abuse of discretion, that is to say, the Commissioner's decision not to exercise

the discretion provided by section 7805(b) to limit the retroactive effect of that ruling was an abuse of that discretion.142

See Automobile Club of Michigan v. Commissioner, 353 U.S. 180,

185 (1957); Becker v. Commissioner, 85 T.C. 291, 294 (1985). As

we understand the thrust of petitioner's contention, the Commissioner changed settled law on which taxpayers had relied when,

with no prior notice to the public, the Service held, inter alia,

in Rev. Rul. 87-89, supra, that a bank engaged in commercial

banking and not controlled by either the borrower or the purported lender in a back-to-back loan transaction could be treated as

a conduit for withholding tax purposes.

Respondent disputes petitioner's contention that Rev. Rul.

87-89, supra, changed settled law. She points out that the

substance over form doctrine on which Rev. Rul. 87-89, supra, is
- 190 -

based is a long-standing, well-known, and firmly established

doctrine of Federal tax law. She also cites Rev. Rul. 76-192,

1976-1 C.B. 205, to illustrate that the Service, years before the

issuance of Rev. Rul. 87-89, supra, treated as a conduit a bank

that was engaged in commercial banking and that was not controlled by the other persons involved in the transaction presented in that ruling.

While we agree with petitioner that the retroactive application of a revenue ruling may constitute an abuse of discretion

where such application changes settled law upon which taxpayers

justifiably relied, Anderson, Clayton & Co. v. United States, 562

F.2d 972, 981 (5th Cir. 1977); Prabel v. Commissioner, 91 T.C.

1101, 1122 (1988), affd. 882 F.2d 820 (3d Cir. 1989), we reject

his contention that Rev. Rul. 87-89, supra, changed settled law

on which taxpayers justifiably relied. Petitioner has not established that, prior to Rev. Rul. 87-89, supra, the law was settled

in the manner he contends. Nor has he shown that, prior to the

issuance of that ruling, taxpayers were not on notice that a bank

or another entity involved in a transaction may be treated as a

conduit even though it is otherwise engaged in business and is

not controlled by the other persons involved in that transaction. 

In this connection, petitioner does not cite any authority holding that such a bank or other entity can never be treated as a
- 191 -

143 Petitioner cites Frank Lyon Co. v. United States, 435 U.S.

561 (1978), to support his contention. His reliance on that case

is misplaced. It is distinguishable from the instant cases. See

supra note 98. 

conduit.143

In point of fact, the well-established substance over form

doctrine and related principles are so broad in their reach as to

permit ignoring or recharacterizing the role of a person in a

transaction that is otherwise engaged in business and is not controlled by any of the other persons involved in that transaction. 

See Koehring Co. v. United States, 583 F.2d at 320; Burns v.

Commissioner, 78 T.C. at 212-213; Estate of Weiskopf v. Commissioner, 64 T.C. at 93-98; Bank of Am. Natl. Trust & Sav.

Association v. Commissioner, 15 T.C. at 552-553. Moreover, as

pointed out by respondent, the public was put on notice when she

issued Rev. Rul. 76-192, supra, years before the issuance of Rev.

Rul. 87-89, 1987-2 C.B. 195, that a bank involved in a transaction may be treated as a conduit even though it is engaged in

commercial banking and is not controlled by the other persons

involved in that transaction. In Rev. Rul. 76-192, supra, the

Service, relying on factors similar to those relied on in Rev.

Rul. 87-89, supra, held that such a bank was a conduit for purposes of determining whether the foreign corporation involved in

Rev. Rul. 76-192, supra, had made an investment in U.S. property

under section 956(a)(1).
- 192 -

The Service had not, prior to the issuance of Rev. Rul. 87-

89, supra, issued a revenue ruling in which, under the substance

over form doctrine, it treated a bank involved in a back-to-back

loan transaction as a conduit for withholding tax purposes even

though it was engaged in commercial banking and was not controlled by the other persons involved in that transaction. However, the Service's failure to do so does not indicate that it

believed that the then existing law precluded such treatment. 

The Service is under no duty to announce its position on a particular issue as soon as the law authorizes that position. See

Dickman v. Commissioner, 465 U.S. 330, 343 (1984).

At worst, the absence of any public announcement by the

Service that specifically addressed its position on the treatment

for withholding tax purposes of such a bank involved in a backto-back loan transaction may simply have indicated the Service's

view that the law with respect to such treatment was unsettled

prior to the issuance of Rev. Rul. 87-89, supra. However, as was

made clear in Anderson Clayton & Co. v. United States, 562 F.2d

at 985 n.30 (quoting Davis, Administrative Law Text, sec. 5.05,

at 135 (3d ed. 1972)): "It is retroactive change of settled law,

not retroactive settling of unsettled law, which may produce

unjust results." The retroactive application of an interpretation of unsettled law, whether by ruling or regulation, is not

an abuse of discretion. See id. at 981-982; Chock Full O' Nuts
- 193 -

144 In advancing his abuse of discretion claim, petitioner

refers to respondent's alleged inconsistent treatment of taxpayers as selective enforcement. We note that, in the context of

allegations of respondent's abuse of discretion, respondent's

obligation to enforce the Federal tax law consistently, and not

to enforce that law selectively, is generally referred to as

respondent's duty of consistency. See Jaggard v. Commissioner,

76 T.C. 222, 226-227 (1981).

145 See supra note 142 regarding the inconsistency of petitioner's contentions.

Corp. v. United States, 453 F.2d 300, 303 (2d Cir. 1971); First

Chicago Corp. v. Commissioner, 96 T.C. 421, 438 (1991).

Based on our review of the entire record before us, we conclude that the Commissioner did not abuse her discretion by failing to limit the retroactive effect of Rev. Rul. 87-89, supra. 

See Anderson, Clayton & Co. v. United States, supra at 983-984.

2. Petitioner's Claim That Respondent

Did Not Comply With Her Duty to Enforce the Federal Tax Law Consistently

Petitioner appears to argue that respondent abused her

discretion by not complying with her duty to enforce the Federal

tax law consistently144 when she applied Rev. Rul. 87-89, supra,

retroactively in these cases but allegedly not in cases involving

similarly situated taxpayers.145 In support of his argument,

petitioner relies on the same circumstances on which he relies on

brief in advancing his position that respondent violated his

right to equal protection of the law under the Fifth Amendment.

Based on our review of the entire record before us, and for
- 194 -

the reasons stated above for our rejection of petitioner's constitutional claim, we find that petitioner has not established

that respondent abused her discretion by not complying with her

duty to enforce the tax law consistently with respect to him,

Radcliffe, and BOT.

VII. Additions to Tax

Neither Radcliffe nor BOT filed withholding tax returns for

the years at issue. Nor did either of those corporations make a

deposit of withholding tax with respect to those years. 

Respondent determined that Radcliffe and BOT are liable for

(1) the additions to tax imposed by section 6651(a)(1) for failure to file timely withholding tax returns, (2) the additions to

tax imposed by section 6653(a) for negligence or disregard of

rules or regulations, and (3) the penalties imposed by section

6656(a) for failure to make timely deposits of taxes. Respondent

further determined that petitioner is liable as a transferee of

those corporations for those additions to tax and penalties.

Section 6651(a)(1) imposes an addition to tax for failure to

file timely a tax return. If the failure continues for more than

four months, the addition to tax is equal to 25 percent of the

amount of tax required to be shown in the return. The addition

to tax prescribed by section 6651(a)(1) does not apply if the

failure is due to reasonable cause, and not to willful neglect. 

Sec. 6651(a)(1). In order to establish reasonable cause, a
- 195 -

146 Sec. 8001(a) of the Omnibus Budget Reconciliation Act of

(continued...)

taxpayer must show that, despite the exercise of ordinary business care and prudence, such taxpayer was unable to file the

required tax return within the prescribed time. United States v.

Boyle, 469 U.S. 241, 246 (1985); Crocker v. Commissioner, 92 T.C.

899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

For 1984 and 1985, section 6653(a)(1) and, for 1986, section

6653(a)(1)(A) impose an addition to tax that is equal to 5 percent of the entire underpayment if any part of it was due to

negligence or disregard of rules or regulations. If that addition to tax applies, for 1984 and 1985, section 6653(a)(2) and,

for 1986, section 6653(a)(1)(B) impose a further addition to tax

in an amount that is equal to 50 percent of the interest payable

with respect to the portion of the underpayment that is attributable to negligence or disregard of rules or regulations. 

Negligence is defined as a lack of due care or failure to do what

a reasonable and prudent person would do under the circumstances. 

Allen v. Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg.

92 T.C. 1 (1989); see Crocker v. Commissioner, supra at 916;

Neely v. Commissioner, 85 T.C. 934, 947-948 (1985).

Section 6656(a) imposes a penalty for failure to deposit

timely a tax in a Government depositary that is equal to 10

percent of the underpayment.146 That section does not apply if
- 196 -

146(...continued)

1986, Pub. L. 99-509, 100 Stat. 1951, sets the amount of that

penalty at 10 percent of the amount of the underpayment, and,

under sec. 8001(b) of that Act, that amendment is effective for

amounts assessed after Oct. 21, 1986, the date of its enactment.

the failure to deposit timely is due to reasonable cause, and not

to willful neglect. Sec. 6656(a).

The parties advance essentially the same arguments with

respect to respondent's determinations involving the various

additions to tax and penalties. We therefore consider those

determinations and arguments together. Petitioner argues that

the additions to tax and penalties at issue should not be imposed

on Radcliffe or BOT because neither of those corporations had any

reason to expect that the payment of the interest at issue in

these cases was subject to withholding tax. In this connection,

petitioner contends that respondent's determinations against

Radcliffe and BOT involving the Bank transactions resulted from

Rev. Rul. 87-89, 1987-2 C.B. 195, that he alleges set forth the

Service's unprecedented treatment as a conduit of a bank involved

in a back-to-back loan transaction that was otherwise engaged in

commercial banking and that was not controlled by the other

persons involved in that transaction. Petitioner further asserts

on brief that the Horbury loan was made prior to October 15,

1984, and that therefore the interest at issue in the Horbury

transaction is exempt from U.S. taxation under article VIII(1)
- 197 -

because it qualifies for the grandfathering provided by Rev. Rul.

85-163, 1985-2 C.B. 349. With respect to the Bank transactions,

petitioner also alleges on brief that accountants prepared

Radcliffe's 1985 and 1986 income tax returns and BOT's 1986

income tax return and that those corporations relied on those

advisers in that regard. With respect to the Horbury transaction, petitioner also claims that his father relied on counsel in

organizing Horbury.

Respondent argues that petitioner has failed to establish

that the additions to tax and penalties determined against

Radcliffe and BOT should be rejected. She contends that the

payment of interest to the respective U.S. banks in question

involved in the Bank transactions was arranged for the purpose of

evading the tax on interest paid to foreign persons that is

required to be withheld by the payor. Respondent also asserts

that petitioner was personally involved in, and acted on behalf

of Radcliffe and BOT, respectively, in arranging and carrying out

the Bank transactions at issue and that his knowledge of the law

with respect to the withholding tax on the payment of interest to

foreign corporations, including the provision exempting from

withholding tax interest paid by a U.S. bank to such corporations, must be imputed to Radcliffe and BOT.

With respect to the Bank transactions, at the time Rev. Rul.

87-89, supra, was issued, application of the substance over form
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147 See also Rev. Rul 76-192, 1976-1 C.B. 205, in which the

Service announced to the public that a bank engaged in commercial

banking and not controlled by the other persons involved in a

transaction could be treated as a conduit under the circumstances

set forth in that ruling.

doctrine and related principles in order to ignore or recharacterize the role of a person in a transaction that was otherwise

engaged in business and that was not controlled by any of the

other persons involved in that transaction was not unprecedented,

as petitioner contends, especially in cases, such as the instant

cases, where no nontax, business purpose had been shown for the

form of the transaction. See Koehring Co. v. United States, 583

F.2d at 320; Burns v. Commissioner, 78 T.C. at 212-213; Estate of

Weiskopf v. Commissioner, 64 T.C. at 93-98; Bank of Am. Natl.

Trust & Sav. Association v. Commissioner, 15 T.C. at 552-553.147

Moreover, petitioner, who acted on behalf of Radcliffe and

BOT, respectively, in arranging and carrying out the Bank transactions at issue herein, admitted at trial that he was familiar

with the U.S withholding tax requirements applicable to interest

from a U.S. source that was paid to foreign corporations.

In short, on the instant record, we reject petitioner's

contention that Radcliffe and BOT had no reason to expect that

withholding was required on the interest payments they made as

part of the Bank transactions in respect of which we have sustained respondent's determinations.
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148 Petitioner does not argue that BOT had no reason to expect

that the interest at issue in the Horbury transaction was subject

to withholding because that interest satisfied the express

provisions of article VIII(1). In any event, in 1984, when that

interest was paid, application of the substance over form doctrine and related principles in order to ignore or recharacterize

the role of a person in a transaction was not unprecedented. 

See, e.g., Aiken Indus., Inc. v. Commissioner, 56 T.C. 925, 933-

934 (1971).

With respect to the Horbury transaction, petitioner has not

shown that the interest at issue in the Horbury transaction is

exempt from U.S. taxation under article VIII(1) because it was

paid on a loan made before October 15, 1984, and therefore qualifies for the grandfathering provided by Rev. Rul. 85-163, supra. 

Indeed, the record is virtually devoid of any reliable evidence

relating to that transaction. On the instant record, we find

that petitioner has failed to show that BOT had no reason to

expect that its payment of the interest at issue in the Horbury

transaction was subject to withholding tax.148

 Petitioner's suggestion on brief that Radcliffe and BOT

relied on advisers is not supported by the record. Petitioner

has not shown that an accountant, attorney, or other adviser gave

advice to Radcliffe and BOT regarding their respective withholding obligations with respect to the Bank transactions. Nor has

petitioner shown that counsel gave advice to petitioner's father

concerning whether Horbury might be treated as a conduit for

withholding tax purposes or that an accountant, attorney, or
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other adviser gave advice to BOT regarding its withholding obligations with respect to the Horbury transaction. Thus, the

instant cases are distinguishable from Coldwater Seafood Corp. v.

Commissioner, 69 T.C. 966 (1978), and Aiken Indus., Inc. v.

Commissioner, 56 T.C. at 936, on which petitioner relies.

Based upon our examination of the entire record in these

cases, we find that, to the extent we have sustained respondent's

determinations with respect to the withholding tax obligations of

Radcliffe and BOT, petitioner has failed to carry his burden of

showing that respondent erred in determining that Radcliffe and

BOT are liable for the additions to tax and penalties that she

imposed in respect of such obligations. Accordingly, we sustain

respondent's determinations with respect to the liability of

Radcliffe and BOT for (1) the additions to tax provided under

section 6651(a) for failure to file timely withholding tax returns with respect to the amounts required to be shown as tax in

such returns that result from this Opinion, (2) the additions to

tax provided under section 6653(a) for negligence and/or disregard of rules or regulations with respect to the underpayments,

as defined in section 6653(c), that result from this Opinion, and

(3) the penalties provided under section 6656(a) for failure to

make timely deposits with respect to the underpayments, as defined in section 6656(a), that result from this Opinion. We also

sustain respondent's determinations that petitioner, as trans-
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feree of Radcliffe and of BOT, is liable for their respective

liabilities for the additions to tax and penalties determined by

respondent that we have sustained herein.

To reflect the foregoing and the concessions of the parties,

Decisions will be entered

under Rule 155.