	GROSS	TOTAL
YEAR	RECEIPTS	DEDUCTIONS	LOSS
1980	868,482	3,205,403	(2,336,921)
1981	352,175	2,237,475	(1,885,300)
1982	61,414	1,527,718	(1,466,304)
1983	22,853	1,181,295	(1,158,442)
1984	384	900,881	(900,497)
1985	565	904,007	(903,442)
1986	(188)	871,463	(871,651)

Expert Opinions

Madison retained several literary appraisers prior to Arts' purchase of the 23 titles. However, they rendered opinion letters dated April 12, 1979 and April 17, 1979, dates subsequent to Madison's purchase from Gallen and Kensington. These letters recited the author's expertise in the field, described the subject of each title, listed the purchase price, stated the number of copies of that title that would have to be sold to recoup its cost, *472 fact, may well exceed it after deductions of all costs" under the services agreements. This language had been written by Madison and adopted virtually verbatim by the appraisers. These opinion letters did not provide any representation of fair market value, or analysis of gross sales, publishing costs, cash flow, or net income expected to be realized from the title. Further, the Offering Memorandum, referring to (but not including) these opinions, cautioned that they were "estimates only" and could not "be regarded as definitive with respect to the relationship between the fair market value of the [titles] and the purchase price thereof."

Petitioner also submitted an expert's report prepared by DeWitt C. Baker (hereinafter Baker), dated January 29, 1986, evaluating the 23 titles, as of March 1979, as a package rather than individually. Baker computed what portion of the notes would have to be amortized*473 before the limited partners received back their cash investment, as well as two to three times their cash investment. However, Baker did not include interest payments required on the notes when making his computations. In this regard, he prepared a table showing the sales level (in copies) required for each title to return its cash investment.

Respondent submitted the expert opinions of Robert Sachs (hereinafter Sachs) and Stephen Conland (hereinafter Conland). Sachs valued the titles as of March 1979, while Conland valued them as of the month they were printed. These appraisers valued the manuscripts individually by computing the net profit*474 expected from each of them. This involved estimating revenues by projecting sales based on the performance of the publisher and distributor, Evidentiary Objections

Before we address whether petitioner is entitled to the losses, deductions, and credits at issue in this case, we must initially decide whether to sustain petitioner's evidentiary objections seeking to exclude from the record the reports and testimony of respondent's two expert witnesses, Sachs and Conland. Petitioner*475 bases its objection to the admission of such evidence on the Court of Appeals for the Second Circuit's opinion in Jacobson v. Commissioner, 915 F.2d 832 (2d Cir. 1990) (hereinafter Jacobson), revg. in part and affg. in part T.C. Memo. 1988-341 (a case decided after we entered our decision in Leger).

In Jacobson, the Court of Appeals for the Second Circuit reversed a decision of this Court which held that the acquisition of a motion picture by a limited partnership was a sham transaction that should be ignored for Federal tax purposes. It determined that we had erred in basing our findings in part upon our own subjective evaluation of the potential profitability of the motion picture. The Court of Appeals for the Second Circuit explained:

We reject this judicial version of the Siskel and Ebert "thumbs up, thumbs down" approach to film evaluation. * * * the court is not to reject profit motive because of subjective dislike of a film's style or disapproval of a film's theme. It is not for courts to predict what themes are geared to popular success. [Id. at 839.]

Relying*476 upon Jacobson, petitioner urges us to find that Sach's and Conland's appraisal reports and testimony were "subjective" and thus inadmissible.

However, the Court of Appeals for the Second Circuit recently rejected such a contention in In re MDL-731-Tax Refund Litig. v. United States, 989 F.2d 1290 (2d Cir. 1993) (hereinafter In re Tax Refund), a case addressing book publishing promotions patterned on those involved here. There, the taxpayers asked the Court of Appeals for the Second Circuit to exclude expert evidence regarding the market value of books because they contended it was "subjective", citing Jacobson as authority for their position. The Court of Appeals for the Second Circuit distinguished Jacobson, where it refused to accept the trial judge's own subjective evaluation, from the expert evidence the taxpayers sought to exclude in In re Tax Refund. It explained that nothing in Jacobson precluded the trier of fact from evaluating expert testimony even though it contained subjective elements, pointing out that:

the appraisers' valuations of the Properties may contain an irreducible subjective element. The appraisal*477 of any property that does not have frequently traded identical substitutes will necessarily be guided by both objective and subjective considerations. * * * [Id. at 1299.]

So, too, in this case, we may consider the expert evidence offered by respondent. The experts' reports and testimony are based, not upon their personal likes and dislikes, but rather upon their expertise in the book publishing industry. Accordingly, we may evaluate the expert evidence, notwithstanding that such evidence may contain "an irreducible subjective element".

Next, petitioner argues that we should exclude respondent's expert evidence because Cohen and the publishers arrived at a purchase price for the titles through arm's-length negotiations. In support of his argument, petitioner again relies on Jacobson, where the Court of Appeals for the Second Circuit in turn cited Sheid v. Commissioner, T.C. Memo. 1985-402, together with the parenthetical "purchase as a result of arm's-length bargaining fixes fair market value; appraisal testimony arguably irrelevant." Jacobson v. Commissioner, supra at 838.*478 From this language, petitioner contends that respondent's appraisal evidence should not be admitted because it has submitted evidence of arm's-length negotiations sufficient to prove that the price Arts paid for its titles reflected their fair market value.

Again, the Court of Appeals for the Second Circuit has already rejected petitioner's contention in In re Tax Refund. There, the taxpayers asked the court to hold that their evidence of a negotiated price for the books made any expert testimony regarding the market value of those titles irrelevant. The Court of Appeals for the Second Circuit refused, reasoning that "The pertinent valuation should, like any question of fact, be determined on all available evidence," and that if the trier of fact "determines that the negotiations were not arm's-length and informed, then it may look to the appraisal evidence as evidence of value." In re MDL-731-Tax Refund Litig. v. United States, supra at 1298. Nothing in Jacobson, therefore, supports the contention that appraisal evidence is inadmissible when there is evidence of arm's-length negotiations. Id. Accordingly, we may admit the expert*479 evidence presented by respondent.

Finally, in its reply brief, petitioner argues that the Court of Appeals for the Second Circuit's opinion in In re Tax Refund does not apply to this case because at issue in In re Tax Refund was the jury's verdict that the promoters had made a "gross valuation overstatement" within the meaning of section 6700, whereas in this case we are determining whether the transaction at issue possessed economic substance.

We disagree. A "gross valuation overstatement" includes a statement as to the value of any property, if the value so stated exceeds 200 percent of the amount determined to be the correct valuation, and if the value of that property is directly related to the amount of a claimed tax deduction or credit. Sec. 6700(b). Therefore, to decide whether a gross valuation overstatement exists within any factual scenario, the trier of fact must compare the stated purchase price with the fair market value of the subject property. See, e.g., United States v. Campbell, 897 F.2d 1317">897 F.2d 1317, 1320 (5th Cir. 1990). Indeed, In re Tax Refund involved just such a comparison.

This same comparison of price to value is *480 also important in determining whether a taxpayer has a profit objective. See Soriano v. Commissioner, 90 T.C. 44">90 T.C. 44, 56-57 (1988). It is also a factor in determining whether, for tax purposes, a transaction possesses economic substance. See Zirker v. Commissioner, 87 T.C. 970">87 T.C. 970, 976 (1986). Therefore, in deciding the present case, one of the factors we may consider involves comparing the purchase price of the 23 titles with their fair market value. Consequently, the Court of Appeals for the Second Circuit's discussion of expert evidence in In re Tax Refund is as relevant in this case as it is in the context of a case brought under section 6700.

Economic substance

Turning our attention now to the substantive issues before us, petitioner first contends that the deductions and credits it claimed are allowable because its interest in Arts possessed economic substance. In general, a transaction is effective for Federal income tax purposes only if its economic substance is consonant with its intended tax effects. Frank Lyon Co. v. United States435 U.S. 561">435 U.S. 561, 573 (1978); Knetsch v. United States, 364 U.S. 361">364 U.S. 361, 364 (1960);*481 Goldstein v. Commissioner, 364 F.2d 734">364 F.2d 734 (2d Cir. 1966), affg. 44 T.C. 284">44 T.C. 284 (1965). That is, the transaction must have economic substance "which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax avoidance features that have meaningless labels attached". Frank Lyon Co. v. United States, supra at 583-584; see Estate of Thomas v. Commissioner, 84 T.C. 412">84 T.C. 412, 432-433 (1985); Hilton v. Commissioner, 74 T.C. 305 (1980), affd. per curiam 671 F.2d 316">671 F.2d 316 (9th Cir. 1982).

In evaluating whether a transaction possesses economic substance, we look to objective factors which indicate whether the taxpayer acquired an equity interest in the property and whether the taxpayer had a reasonable opportunity for economic success. Levy v. Commissioner, 91 T.C. 838">91 T.C. 838, 856 (1988); Packard v. Commissioner, 85 T.C. 397">85 T.C. 397, 417 (1985). We have found the following factors to be particularly*482 important in determining whether a transaction possesses economic substance: The presence or absence of arm's-length price negotiations, Helba v. Commissioner, 87 T.C. 983">87 T.C. 983, 1005-1007 (1986), affd. without published opinion 860 F.2d 1075">860 F.2d 1075 (3d Cir. 1988); the relationship between the sales price and fair market value, Zirker v. Commissioner, supra at 976; the structure of the financing, Helba v. Commissioner, supra at 1007-1011; whether there was a shifting of the burdens and benefits of ownership, Rose v. Commissioner, 88 T.C. 386">88 T.C. 386, 410 (1987), affd. 868 F.2d 851">868 F.2d 851 (6th Cir. 1989); the degree of adherence to contractual terms, Helba v. Commissioner, supra at 1007-1011; and, the reasonableness of the income projections, Rice's Toyota World, Inc. v. Commissioner, 81 T.C. 184">81 T.C. 184, 204-207 (1983), affd. in part and revd. in part 752 F.2d 89">752 F.2d 89 (4th Cir. 1985). We consider each of these factors in turn.

The presence or *483 absence of arm's-length negotiations

Petitioner contends that the record in this case contains sufficient evidence for us to find, not only that Cohen engaged in arm's-length negotiating to purchase the titles, but that such arm's-length negotiating established the fair market value of the properties acquired by Arts. In considering petitioner's argument, first let us specify exactly what negotiations we are evaluating. Because Cohen owned (either directly or indirectly), controlled, and operated Madison, Arts, and Bromwell, he could and did arrange the transactions between them. No negotiations, at arm's-length or otherwise, took place between those entities.

On the other hand, Cohen's negotiations with Gallen and Kensington on behalf of Madison were between unrelated third parties. However, despite petitioner's argument to the contrary, the interests of these third parties were not always adverse to one another. To determine that an arm's-length transaction took place, we must find that the buyer was motivated to secure the lowest purchase price possible and, conversely, that the seller looked to obtain the highest price.

Yet, it is evident that Cohen had little interest*484 in securing the lowest price for Madison. In fact, just the opposite was true. To support the tax benefits promised to Arts' limited partners, Cohen had to maximize the purchase price to provide the high tax basis needed to support the excessive depreciation deductions and investment tax credits that would be claimed by them. Cf. Patin v. Commissioner, 88 T.C. 1086">88 T.C. 1086, 1122 (1987), affd. without published opinion sub nom. Hatheway v. Commissioner, 856 F.2d 186">856 F.2d 186 (4th Cir. 1988), affd. sub nom. Skeen v. Commissioner, 864 F.2d 93 (9th Cir. 1989), affd. without published opinion 865 F.2d 1264">865 F.2d 1264 (5th Cir. 1989), affd. sub nom. Gomberg v. Commissioner, 868 F.2d 865 (6th Cir. 1989); Capek v. Commissioner, 86 T.C. 14">86 T.C. 14, 48-49 (1986); Ferrell v. Commissioner, 90 T.C. 1154">90 T.C. 1154, 1186 (1988). Cohen accomplished this by having Madison give Gallen and Kensington large amounts of nonrecourse notes as part of the total purchase price, bringing the total purchase price by Madison up to $ 11,690,000. *485 Arts assumed these notes when it purchased the 23 titles for a total purchase price of $ 12,319,000.

Despite the substantial prices petitioner alleges Cohen "negotiated" in tough bargaining sessions, there is little indication in this record of how Cohen arrived at the fair market value of these titles before Madison purchased them. The appraisals basically were written by Madison after the transaction had been "negotiated". Moreover, Cohen himself had read only one of the titles.

In addition, when Arts made its purchase from Madison in May of 1979, the publishers had already solicited sales and printed 14 of the titles. The results of the solicitation indicated that these titles would not sell a sufficiently large number of copies to generate the income necessary to justify the prices Cohen agreed to pay for them. Had Cohen truly engaged in arm's-length negotiations on behalf of Madison, he would have taken these bleak prospects into account.

On the other hand, when we focus on the cash aspect of the negotiations, it was in Cohen's interest to minimize the amount that would go to Gallen and Kensington. In this, he succeeded quite well. Madison initially paid them only $ *486 6,500 in cash upon signing the agreement, and promised to pay another $ 157,000 by the end of 1979, after Madison would have sold the properties to Arts. But when Cohen arranged the sale between Madison and Arts (that part of the transaction in which he represented both parties), Cohen structured a deal that involved a great deal of cash. Arts paid Madison $ 824,000 in cash, more than four times the cash Madison would pay Gallen and Kensington. Since Cohen's family owned Madison, all of such cash inured to his family's benefit.

Thus here, as in Fox v. Commissioner, 80 T.C. 972">80 T.C. 972, 1010 (1983), affd. sub nom. Barnard v. Commissioner, 731 F.2d 230">731 F.2d 230 (4th Cir. 1984):

The record is devoid of evidence showing that the purchase price * * * was in any way determined with a "true regard for the profitability of the activity." Brannen v. Commissioner, supra at 509. The negotiations were conducted only with a view toward benefiting both the promoters (in cash) and potential limited partners (in tax benefits).

For their part, Gallen and Kensington bargained for enough cash to cover the costs of their initial printing, *487 plus the profit from the sales proceeds generated by the initial and secondary printings. There is no indication, however, that they insisted upon the vastly inflated purchase prices reflected in their agreements with Madison. Having received assurances of the cash and potential profit they sought, however, Gallen and Kensington had no reason to object to artificially inflating the selling price. Flowers v. Commissioner, 80 T.C. 914">80 T.C. 914, 935 n.28 (1983). We conclude, therefore, that the negotiations between the publishers and Cohen (on behalf of Madison) were not arm's-length negotiations which were "compelled or encouraged by business or regulatory realities * * * imbued with tax-independent considerations". Frank Lyon Co. v. United States, 435 U.S. at 583-584. It follows then that the acquisition agreements do not reflect the fair market value of the property purchased therein.

The relationship between sales price and fair market value

The Court of Appeals for the Ninth Circuit has described an inflated purchase price as "Perhaps the most important single factor suggesting that the actual motive for the * * * *488 activities was tax avoidance rather than even speculative profit". Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724">781 F.2d 724, 728 (9th Cir. 1986), affg. T.C. Memo 1984-472">T.C. Memo. 1984-472. The importance of this factor must have been obvious to petitioner, whose burden it was to prove a close relationship between the sales price and fair market value of the titles. Yet, petitioner has completely failed to discharge that obligation.

We cannot take seriously the 1979 appraisals submitted by petitioner. The language in the appraisals was largely prepared by Madison and reflected the high prices it already had paid to purchase the titles from Gallen and Kensington. Moreover, these appraisals did not undertake to determine the titles' fair market value by the use of any type of objective criteria, nor did they consider the results of the publishers' solicitation for 14 of the 23 titles here involved.

Mr. Baker's appraisal was equally unhelpful. He adopted the stated purchase prices as fair market value. He considered the number of sales necessary for the investors to receive back the cash portion of their investment (without taking *489 interest into account), but did not evaluate the likelihood of achieving such sales. His report endorsed the titles using vague generalities, such as "largest sale potential", or "strong category", without specifically quantifying such terms.

Respondent's experts provided far more information and analysis. Sachs and Conland valued the manuscripts individually by computing the net profit expected from each of them. ^{*490 They estimated income by projecting sales based on the performance of the publisher and distributor, Seaman v. Commissioner, 84 T.C. 564">84 T.C. 564, 593-594 (1985); Surloff v. Commissioner, 81 T.C. 210">81 T.C. 210, 235-236 (1983).}

On brief, petitioner renews its argument that respondent's experts were too subjective, that is, that*491 their values reflected their personal tastes rather than objective considerations. However, like the Court of Appeals for the Second Circuit in In re Tax Refund, we are not troubled by the fact that the experts' valuation may contain a subjective element. Further, notwithstanding any subjective element, respondent's experts' reports were far more objective and far more convincing than those offered by petitioner.

Moreover, petitioner's contention misses the point. It was petitioner's burden to establish a proximity between the $ 12,319,000 purchase price for the titles and their actual fair market value. Nonetheless, petitioner made no serious attempt to meet its burden of showing that the purchase price reflected such value. Such attempts as it did make contained little in the way of objective analysis.

In conclusion, we find that petitioner has not submitted evidence regarding the fair market value of the titles which materially differs from such evidence in Leger. Consequently, for the reasons already stated in Leger v. Commissioner, T.C. Memo. 1987-146, we again conclude that the total value of all 23 titles was less than one million*492 dollars -- or less than one-twelfth of the total of their stated purchase prices.

The structure of the financing

The greatest portion of the purchase price of the titles ($ 11,495,000 out of a total of $ 12,319,000) was financed by nonrecourse notes. Courts have found that a transaction with large amounts of debt (especially of the nonrecourse variety) is an important characteristic of a program that lacks economic substance, especially when, as a practical matter, there is little possibility that the notes will ever be paid. See, e.g., Waddell v. Commissioner, 86 T.C. 848">86 T.C. 848, 902 (1986), affd. per curiam 841 F.2d 264">841 F.2d 264 (9th Cir. 1988); Elliott v. Commissioner, 84 T.C. at 238; Estate of Baron v. Commissioner, 83 T.C. 542">83 T.C. 542, 552-553 (1984), affd. 798 F.2d 65">798 F.2d 65 (2d Cir. 1986).

In this case, it is abundantly clear that the nonrecourse notes Madison gave Gallen and Kensington would never be paid. For Arts to pay off the 23 notes (not including interest), eachKensington title would have to sell over 311,000 copies, while eachGallen*493 title would have to sell over 1,100,000 copies. (Obviously, these numbers would be even higher if interest on the notes had been taken into account.) Yet, in 1979, Gallen's best selling title sold approximately 250,000 copies while Kensington had no title selling more than 400,000 copies. ^{*494 In fact, it seems that the promoters themselves harbored no serious notions that the notes would be paid off. The Offering Memorandum warned investors of the competitive nature of the book publishing business by stating:}

In excess of 43,000 books were published in the United States in 1977. Approximately 13,000 of these books were paperbacks of which in excess of 1,800 were mass market paperbacks. Many of these books receive little, if any, promotion or review by literary critics, thereby reducing the possibility of financial success for such books. There are many book publishers and distributors which possess substantial financial resources, large and experienced staffs, and, doubtless, ownership of substantially more literary properties than [Arts].

In sum, the unrealistically large sales needed to pay off the notes show that the amount financed was largely inconsistent with any net revenue the title might have produced. Given the nonrecourse nature of the debt, the fact that the titles securing the debt had a fair market value of no more than one million dollars, and that it was unlikely that sufficient revenues to pay off the debt were likely to be produced, we *495 conclude that this purported financing was largely inconsistent with economic reality.

Shifting of the burdens and benefits of ownership

The transaction between Madison (and thereafter Arts) was framed so that the publishers never relinquished the burdens and benefits of owning the titles. Gallen and Kensington acquired and edited the manuscripts, designed the cover, and then, together with Confucian, Hercules, Dell, and Kable, promoted, printed, and distributed the titles.

Gallen and Kensington also retained the benefits of such ownership. Their arrangements with Madison and its assignee Arts provided that the publishers (or their subsidiaries) were entitled to cash, plus fees, under the services agreements for producing and selling the books, plus note payments equal to 60 percent of the gross proceeds from those sales. The net effect was that the publishers would retain all the gross proceeds on the initial and secondary sales.

On the other hand, other than claiming ownership, Madison (and thereafter Arts) had little to do with controlling, publishing, or promoting the titles. They merely paid relatively small amounts of cash to the publishers for bare ownership rights; *496 their primary interest was in establishing a basis for claiming the inflated tax benefits allegedly generated by their ownership of the titles.

Adherence to contractual terms

There is no indication in the record that the parties to the various contracts failed to abide by the terms of their respective agreements. However, as we have already concluded, the contracts were not arrived at by adverse parties participating in arm's-length negotiations. Rather, they were drafted to provide a structure for claiming tax benefits. Compliance with contrived contractual arrangements does nothing to suggest that the program possessed economic substance.

Reasonableness of the income projections

We think it obvious that promoters of a program imbued with economic substance would, in their Offering Memorandum, try to demonstrate to a prospective investor that the program was likely to be profitable by including income projections prepared based on stated and reasonable assumptions. Yet, here the Offering Memorandum contained only generalized assertions that the titles would generate sufficient income to repay the notes. The only specific discussion in the Offering Memorandum about*497 the financial aspects of the transaction was directed to anticipated tax benefits.

Moreover, the vague opinions of economic value provided in petitioner's experts' reports did not indicate the fair market value of the titles, nor did they make any projections of sales or profits. Instead, they merely recited that the revenues, net of costs under the services agreements, would equal or exceed the purchase price. Even in making these generalized conclusions, the substantial effect that the interest payable on the notes would have had upon profitability was overlooked. We conclude that the absence of such projections strongly suggests that the transactions at issue lacked economic substance.

Nevertheless, petitioner argues that where a transaction changes the beneficial and economic rights of the parties, that transaction must possess economic substance, citing Rosenfeld v. Commissioner, 706 F.2d 1277">706 F.2d 1277, 1283 (2d Cir. 1983), affg. T.C. Memo. 1983-263 (hereinafter Rosenfeld), in support of its contention. In Rosenfeld, both this Court and the Court of Appeals held that a physician, who had transferred an office building*498 into trust for the benefit of his children, could nevertheless deduct his rent for office space that he leased from that trust. In approving the claimed deductions, the Court of Appeals stated "If * * * [the parties'] legal rights and beneficial interests have changed, there is no basis for labeling a transaction a 'sham' and ignoring it for tax purposes." Id. at 1282.

In so holding, the Court of Appeals, like this Court, noted four reasons for deciding that the gift-leaseback transaction at issue had effectively changed ownership of the office building for tax purposes. First, the physician relinquished control of the office building to independent trustees. Second, the rent paid for the building reflected its fair rental value. Third, the leaseback had a bona fide business purpose -- the physician needed an office. And fourth, the physician did not retain any legal or equitable rights (such as a reversionary interest) in the property. Id.

In contrast, Gallen and Kensington retained control over the property they ostensibly sold. The selling price of the titles did not reflect their fair market value. In addition, neither Madison nor Arts*499 had a valid business purpose (outside of tax considerations) for investing in an endeavor that was virtually guaranteed never to make a profit. See Leger v. Commissioner, T.C. Memo 1987-146">T.C. Memo. 1987-146. Finally, the publishers retained a security interest in the titles; in the event of the purchasers' default on the notes, they could reclaim the titles, which served as the only security for the payment of those notes. Based on these differing factual characteristics, Rosenfeld is simply not applicable here.

We acknowledge that documents were executed transferring legal ownership of the titles from Madison to Arts. Such formalisms, however, do not preclude us from investigating the substance of the transaction. See Knetsch v. United States, 364 U.S. at 365-367; Muserlian v. Commissioner, 932 F.2d 109">932 F.2d 109, 111 (2d Cir. 1991), affg. T.C. Memo. 1989-493; Hoffman Motors Corp. v. United States, 473 F.2d 254">473 F.2d 254, 257 (2d Cir. 1973); Hulter v. Commissioner, 91 T.C. 371">91 T.C. 371, 387-388 (1988). We will not give effect to a series*500 of transactions, even though they actually take place, when the transactions have no business or profit-making function other than obtaining tax benefits. In such cases, we disregard the transactions for tax purposes, "though all the proceedings [have] their usual effect." Helvering v. Gregory, 69 F.2d 809">69 F.2d 809, 811 (2d Cir. 1934), affd. 293 U.S. 465">293 U.S. 465 (1935); see Falsetti v. Commissioner, 85 T.C. 332">85 T.C. 332, 347 (1985). Accordingly, because the objective facts of this case reveal no credible basis for finding that the transactions at issue possessed economic substance, we hold that they lack their intended effect for Federal income tax purposes. Frank Lyon Co. v. United States, 435 U.S. at 573; Knetsch v. United States, supra at 366; James v. Commissioner, 87 T.C. 905">87 T.C. 905, 918 (1986), affd. 899 F.2d 905">899 F.2d 905 (10th Cir. 1990). ^{*501 On brief, the parties have also presented a number of other arguments addressing whether petitioner is entitled to the deductions and credits afforded by its participation as a limited partner in Arts, primarily those directed toward whether petitioner possessed an actual and honest objective of making a profit from its investment in Arts. We acknowledge that a profit objective is necessary for the allowance of the deductions and credits at issue. However, since we have held that the transactions in issue lacked economic substance, and therefore such deductions and credits are not allowable, it is unnecessary for us to address petitioner's profit objective because "it is well established that a subjective profit motive can not save a transaction that objectively lacks economic substance". Gardner v. Commissioner, 954 F.2d 836">954 F.2d 836, 839 (2d Cir. 1992), affg. T.C. Memo. 1988-570.}

Interest Deductions

Respondent disallowed an interest expense deduction of $ 310,650 claimed by petitioner for its taxable year 1979. The deduction arose in connection with the nonrecourse promissory notes given as part of the purchase of the*502 titles by Madison to Gallen and Kensington, and subsequently assumed by Arts. The parties have stipulated that, if we find that the nonrecourse promissory notes are not includable in the tax basis of the titles for purposes of computing depreciation, the interest is not deductible.

Under sections 1011 and 1012, the tax basis of an asset is generally the same as its cost. However, where the purchase price and the principal amount of a nonrecourse note have been shown to unreasonably exceed an asset's fair market value, the courts have excluded from basis the amount of the nonrecourse indebtedness used to acquire the asset. Under such circumstances, we have reasoned that no genuine indebtedness existed since there was no economic incentive to repay the debt. Coleman v. Commissioner, 87 T.C. 178">87 T.C. 178, 209 (1986), affd. without published opinion 833 F.2d 303">833 F.2d 303 (3d Cir. 1987); Herrick v. Commissioner, 85 T.C. 237">85 T.C. 237, 260 (1985).

Here, Arts purchased 23 titles for $ 12,319,000 of which $ 11,495,000 was "paid" by Arts' assumption of Madison's nonrecourse debt. Since we have already found that the fair market*503 value of the 23 titles purchased by Arts was less than one million dollars, it follows that the nonrecourse debt Arts assumed was not genuine indebtedness and, consequently, petitioner may not deduct its share of interest on such "debt". Knetsch v. United States, supra at 365-367; Muserlian v. Commissioner, supra at 113; United States v. Philatelic Leasing, Ltd., 794 F.2d 781">794 F.2d 781, 786 (2d Cir. 1986).

Nevertheless, petitioner argues that, because the notes had specific due dates and the payments were made upon the principal balance, such notes should be considered part of the payment for the titles, citing Jackson v. Commissioner, 86 T.C. 492 (1986), affd. 864 F.2d 1521">864 F.2d 1521 (10th Cir. 1989), in support thereof. As we noted in Jackson, however, there must be economic substance supporting the stated amount of the debt for such debt to constitute payment. Id.. at 521. Because we have already decided that there was no economic substance to Arts' purchase of the titles, Jackson does not aid petitioner's*504 cause. See Driggs v. Commissioner, 87 T.C. 759">87 T.C. 759, 772-773 (1986).

Petitioner also argues that, in this case, only prepayment of the note was dependent upon sales; after a certain date, the note would be payable regardless of sales. On this basis, it attempts to distinguish Estate of Baron v. Commissioner, 83 T.C. at 549-550, arguing that the debt in that case was payable only from proceeds and the issuer had no obligation to promote the purchased property.

However, petitioner's argument ignores the fact that Arts' partners were not personally liable on the note and the titles themselves were the only security for the note. Because the amount of the note far exceeded the value of the titles, there was no economic incentive for anyone to make further payments. Estate of Franklin v. Commissioner, 544 F.2d 1045">544 F.2d 1045, 1049 (9th Cir. 1977), affg. 64 T.C. 752">64 T.C. 752 (1975); see Elliott v. Commissioner, 84 T.C. at 246-247. It follows then that the notes did not constitute a genuine indebtedness and, therefore, respondent properly disallowed the*505 concomitant interest.

Addition to Tax - Section 6653

Respondent determined that petitioner is liable for the addition to tax under section 6653(a), for negligence or intentional disregard of the rules or regulations. Negligence has been defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Zmuda v. Commissioner, 731 F.2d 1417">731 F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714">79 T.C. 714 (1982); Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Petitioner bears the burden of proving that the addition to tax should not be imposed. Rule 142(a); Jim Burch & Associates, Inc. v. Commissioner, 76 T.C. 202">76 T.C. 202, 208 (1981).

Petitioner makes several arguments as to why the addition to tax for negligence should not be imposed. First, petitioner contends that it reported the correct amount of tax on its Federal income tax returns. However, since we have held that petitioner claimed deductions and credits that were not allowable because the transactions upon which they were based lacked economic substance, in fact, *506 petitioner did understate the amount of its taxes.

Next, petitioner argues that, because it organized and operated Arts with the advice of attorneys and accountants, obtained a tax opinion in connection with its promotion of Arts, and relied on these professionals in good faith, the imposition of the addition to tax for negligence is precluded. Although it is true that reliance on the advice of professionals may defeat a finding of negligence, to absolve the taxpayer of the negligence addition to tax, such reliance must be reasonable. Industrial Valley Bank & Trust Co. v. Commissioner, 66 T.C. 272">66 T.C. 272, 283 (1976).

We do not construe this record as petitioner would have us do. To the contrary, Cohen, who controlled petitioner, was an intelligent and savvy individual, experienced in the world of business. He caused petitioner to formulate and promote the Bromwell programs, a series of tax sheltered offerings. See Elliott v. Commissioner, supra; Cashman v. Commissioner, T.C. Memo. 1989-533, affd. 930 F.2d 26">930 F.2d 26 (9th Cir. 1991); Leger v. Commissioner, T.C. Memo. 1987-146;*507 Ziegler v. Commissioner, T.C. Memo. 1984-620. One such offering was Arts, a program which we have found did not even approach being an enterprise that was "compelled or encouraged by business or regulatory realities" but rather was an enterprise "shaped solely by tax-avoidance features that have meaningless labels attached". Frank Lyon Co. v. United States, 435 U.S. at 583-584. Given Cohen's extensive experience in this area of business and his role in the Bromwell programs, we cannot accept petitioner's argument that he relied upon the tax opinion included in the Offering Memorandum. This is especially true in view of the fact that the tax opinion contained such carefully circumscribed "non-advice" as the following:

Limited Partners should be aware that the Service has indicated that such transactions will be subject to particular scrutiny, and that no assurance can be given that a challenge by the Service will not be successful in any given case.

Rather, we believe that Cohen was the individual who obtained the tax opinion from legal counsel for inclusion in the Offering Memorandum. Through his discussions*508 with such counsel, he must not only have known of the tax risks involved but, ignoring these risks, went on to profit from the promise of tax benefits to others. Under these circumstances, we find that the deductions and credits claimed by petitioner, a corporation controlled by Cohen, were the result of its negligent or intentional disregard of the rules or regulations, and the additions under section 6653(a) were properly determined.

Increased Interest - Section 6621(c)

Respondent also determined that petitioner is liable for the enhanced rate of interest provided for by section 6621(c), on the grounds that petitioner made a substantial underpayment of tax attributable to a valuation overstatement. Petitioner contends that it did not make any valuation overstatement which would result in the imposition of the increased rate of interest.

Section 6621(c) provides for interest on the unpaid tax at a rate equal to "120 percent of the underpayment rate" (provided for in section 6621(a)(2)), where there is a substantial underpayment of tax attributable to a tax-motivated transaction. Such a transaction includes "any valuation overstatement (within the meaning of section 6659(c))". *509 Sec. 6621(c)(3)(A)(i). Under section 6659(c), a valuation overstatement exists when "the value of any property, or the adjusted basis of any property, claimed on any return is 150 percent or more of the amount determined to be the correct amount" of the value or adjusted basis of that property.

We have found that the fair market value of the 23 titles Arts purchased was less than one million dollars. On its income tax return, Arts claimed that the titles had a tax basis of $ 12,319,000. The amount of basis claimed by petitioner vastly exceeds the 150 percent threshold for the application of section 6621(c). Accordingly, we hold that there was a valuation overstatement within the meaning of section 6621(c), and that, therefore, the increased interest rate applies.

Conclusion

Our resolution of the issues discussed above entirely disposes of the deficiencies and additions to tax at issue. Therefore, we need not examine the other arguments presented by the parties. Accordingly, and because both parties previously have made concessions,

Decision will be entered under Rule 155.

APPENDIX A
	Gallen's and
	Kensington's	Madison's Purchase Price
Title	^Cash	Notes
1	$ 10,000	$ 10,500	$ 800,000
2	6,000	10,500	800,000
3	9,000	10,500	800,000
4	9,000	10,500	800,000
5	8,000	18,000	1,400,000
6	5,000	13,000	925,000
7	7,500	11,000	687,600
8	3,000	11,000	687,600
9	3,000	11,000	687,600
10	4,000	11,000	687,600
11	4,000	11,000	687,600
12	1,500	3,000	211,000
13	2,500	3,000	211,000
14	1,750	3,000	211,000
15	2,500	3,000	211,000
16	2,000	3,000	211,000
17	2,000	3,000	211,000
18	1,500	3,000	211,000
19	1,500	3,000	211,000
20	1,500	3,000	211,000
21	1,500	3,000	211,000
22	1,750	3,000	211,000
23	2,000	3,000	211,000
	$ 90,500	$ 164,000	$ 11,495,000

*510

APPENDIX A
	Art's Purchase Price		Respondent's Value
Title	Cash	Notes	Sachs	Conland
1	$ 75,000	$ 800,000	$ 15,400	$ 12,000
2	75,000	800,000	13,200	14,000
3	75,000	800,000	15,400	13,000
4	75,000	800,000	15,400	13,500
5	100,000	1,400,000	13,200	5,000
6	70,000	925,000	10,000	17,000
7	32,400	687,600	7,500	6,000
8	32,400	687,600	4,800	6,500
9	32,400	687,600	5,200	8,500
10	32,400	687,600	4,800	8,500
11	32,400	687,600	7,100	7,500
12	16,000	211,000	3,000	1,500
13	16,000	211,000	3,750	3,000
14	16,000	211,000	2,600	-0-
15	16,000	211,000	3,000	500
16	16,000	211,000	2,600	1,500
17	16,000	211,000	2,200	1,200
18	16,000	211,000	2,600	1,200
19	16,000	211,000	1,900	1,200
20	16,000	211,000	2,200	1,200
21	16,000	211,000	2,200	1,000
22	16,000	211,000	2,600	1,500
23	16,000	211,000	2,600	1,400
	$ 824,000	$ 11,495,000	$ 143,250	$ 126,700

*511

APPENDIX B
	Per Offering	Copies Each
	Memorandum	Title Required
	Copies Required	To Return Its	Date of
	To Pay Off Note	Cash Investment	First
TITLE	(Without Interest)	(Per Baker)	Printing
1	1,100,000	483,333	7/79
2	1,100,000	483,333	8/79
3	1,100,000	483,333	8/79
4	1,100,000	483,333	9/79
5	1,900,000	594,000	6/80
6	1,350,000	511,111	5/79
7	765,000	229,600	9/79
8	885,000	243,363	10/79
9	850,000	243,363	8/79
10	765,000	229,600	10/79
11	850,000	243,363	5/79
12	311,000	110,796	6/79
13	311,000	115,796	9/79
14	367,000	115,796	8/79
15	367,000	117,051	6/79
16	367,000	122,051	9/79
17	367,000	122,051	3/79
18	367,000	122,051	3/79
19	367,000	122,051	3/79
20	367,000	122,051	4/79
21	367,000	122,051	4/79
22	367,000	122,051	4/79
23	367,000	122,051	4/79
	16,057,000	5,669,834

	Copies
	Printed	Respondent's Sales Projections
	and	(Number of Copies)
TITLE	Distributed	Sachs	Conland
1	238,759	175,000	90,000
2	210,825	150,000	90,000
3	210,600	175,000	90,000
4	159,150	175,000	90,000
5	131,895	150,000	75,000
6	130,500	125,000	100,000
7	65,621	80,000	50,000
8	30,096	60,000	50,000
9	50,097	55,000	50,000
10	59,672	50,000	50,000
11	67,349	75,000	50,000
12	43,887	35,000	20,000
13	30,254	40,000	22,500
14	30,563	35,000	17,500
15	30,138	40,000	20,000
16	35,636	35,00	20,000
17	38,856	30,000	20,000
18	35,539	35,000	20,000
19	35,709	25,000	20,000
20	30,096	30,000	20,000
21	30,067	30,000	20,000
22	30,101	35,000	20,000
23	30,223	35,000	20,000
	1,752,633	1,675,000	1,025,000

*512

Footnotes

1. Unless otherwise specified, all section references are to the Internal Revenue Code of 1986. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Petitioner filed its Federal income tax returns based on fiscal years ending on October 31st. Hereinafter, all references to petitioner's taxable years of 1978, 1979, and 1980 shall refer to petitioner's fiscal years ending October 31, 1978, October 31, 1979, and October 31, 1980, respectively.↩
3. The parties have settled the following issues: (1) For its taxable year 1978, petitioner conceded that respondent's disallowance of $ 3,493 of taxes is correct; (2) for the taxable years 1978 and 1979, a part of respondent's proposed adjustments relate to contributions, which were statutory adjustments generated by other adjustments and, consequently, the correct amount of petitioner's contribution deductions will be determined based upon our resolution of other issues in this case; and (3) for the taxable year 1980, respondent disallowed $ 635,300 in printing expense, but has conceded $ 579,300 of this amount. The remaining $ 56,000 remains at issue.↩
4. The term "mass market paperback" refers to rack-sized paperback books. They are usually marketed by national magazine distributors and independent wholesalers to various retail establishments. They are distinguishable from non-rack-sized "trade" paperback books that generally are marketed through bookstores.↩
5. All subsequent reference to these titles will be by number.↩
6. Hardcover publications subsequently distributed as paperbacks are known as "reprints".↩
7. A "manuscript" or "work" is the raw product submitted to a publisher by an author as distinguished from a "title" which is the finished product ready for printing.↩
8. See appendix A for the exact amount of the advance each author received.↩
9. The record does not reflect on what date this agreement was assigned to Gallen.↩
10. See appendix A for the exact amount each author received.↩
11. The amounts of the notes were $ 800,000 for each of titles 1-4; $ 1,400,000 for title 5, and $ 925,000 for title 6. See appendix A.↩
12. The amounts of the notes were $ 687,600 for each of titles 7-11; and $ 211,000 for each of titles 12-23. See appendix A.↩
13. The average life of a mass market paperback is less than 1 year.↩
14. Confucian guaranteed an initial printing of 150,000 for titles 1-5 and 200,000 for book 6; Kensington guaranteed an initial printing of: 100,000 copies for titles 7-11; 40,000 copies for titles 12 and 15-23; 45,000 copies for title 13; and 35,000 copies for title 14.↩
15. Contracts between Dell and Kable as distributors and Gallen and Kensington as publishers actually date back to 1978 and 1974 respectively. No evidence was produced to show any written contractual obligations between Confucian and Dell or Hercules and Kable.↩
16. The fee varied between $ 8,000 and $ 42,000 on initial sales. The rate then varied between $ .32 and $ .42 per copy on secondary sales, and varied between $ .133 and $ .175 for all copies sold thereafter. For example, for title 9, Madison agreed to pay $ 19,000 for the first 22,100 copies sold, $ .377 for each of the next 87,900 copies sold, and $ .152 for each copy sold thereafter.↩
17. The payment of $ 2,000 per title was part of the consideration.↩
18. See appendix B for the date each title was first printed and the number of copies printed and distributed.↩
19. The Offering Summary explained: "4+ to 1 EQUIVALENT WRITE-OFFS IN 1979, AND 1 TO 1↩ IN 1980."
20. The Offering Summary explained that:
While recapture exists in a technical sense due to the possibility of "forgiven debt", there are corresponding offsets predicated on accrued unused depreciation, thereby avoiding any future tax liabilities. Tax credits on the other hand are not subject to recapture -- see Tax Opinion in memorandum * * *.↩
21. See appendix B.↩
22. The appraisers received these amounts from Madison. They are the same as those listed in the Offering Memorandum.↩
23. See appendix B.↩
24. See appendix B for projected sales in copies.↩
25. See appendix A for Sach's and Conland's valuations of each of the 23 titles.↩
26. Sachs valued the titles as of March 1979, while Conland valued them as of the month they were printed.↩
27. See appendix B for projected sales in copies.↩
28. See appendix A for Sach's and Conland's valuations of the 23 titles.↩
29. Petitioner contends that these figures are irrelevant, because they were not available when petitioner purchased the titles in 1979. However, this contention ignores the point that it was petitioner's obligation to produce evidence to prove that the notes were likely to be paid and its publishers' past success in selling mass market paperbacks certainly is an important factor to consider in evaluating their chance of succeeding in a comparable transaction. Rule 142(a).↩
30. On its Federal income tax return, Arts reported losses of many millions of dollars for 1980 through 1986. Petitioner argues that use of the figures showing the post-acquisition performance of Arts constitutes impermissible hindsight in evaluating Arts' prospects as of 1979. We do not recite these figures for purposes of deciding this case by hindsight. Instead, we have set them forth to show that subsequent events are consistent with our evaluation that the Arts' transaction lacked economic substance during the years at issue. See Levin v. Commissioner, 832 F.2d 403">832 F.2d 403, 406 n.3 (7th Cir. 1987), affg. 87 T.C. 698">87 T.C. 698↩ (1986).
1. In addition, for every title except number 11, Gallen and Kensington agreed to pay royalties of 6 percent on the net retail sales of the first 150,000 copies and 8 percent on the net retail sales of all additional copies. For title 11, the royal percentages at these levels were 8 and 10 percent.↩