UNITED STATES TAX COURT

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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

. . . . . . . . . . . . . . . . . . . . . .

General and Background . . . . . . . . . . . . . . . . .

Radcliffe . . . . . . . . . . . . . . . . . . . . .

BOT . . . . . . . . . . . . . . . . . . . . . . . .

Certain Foreign Corporations That Pledged

- 2 Cash Collateral in the Transactions at Issue . . .

Pioneer Industries (Holdings) Ltd. and Its

Subsidiaries Multi-Credit Finance Co. Ltd.

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

Traveluck Investments, Inc. . . . . . . . . .

Double Wealth Co., Inc. . . . . . . . . . . .

Forward Investments, Ltd. . . . . . . . . . .

Bangkok Bank Ltd.

. . . . . . . . . . . . . . . .

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

Petitioner . . . . . . . . . . . . . . . . . . . .

Transactions Involving Bangkok Bank Ltd. . . . . . . . .

BB Loan No. 1 . . . . . . . . . . . . . . . . . . .

BB Loan No. 2 . . . . . . . . . . . . . . . . . . .

BB Loan No. 3 . . . . . . . . . . . . . . . . . . .

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

UB $570,000 Pre-March 1984 Loan

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

UB $325,000 Loan . . . . . . . . . . . . . . . . .

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

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

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

Facts Pertaining to All the Transactions

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

IV.

Transaction Involving Horbury

. . . . . . . . . . . . .

Income or Loss Reported by Radcliffe

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

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . .

II.

Evidentiary Matters . . . . . . . . . . . . . . . . . .

The Adverse Inference Rule-Mme. Koo's Failure To Testify . . . . . . . . . . .

Evidentiary Objections . . . . . . . . . . . . . .

Petitioner's Income Tax Returns . . . . . . .

Certain Instruments of Transfer

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

Horbury Financial Statement . . . . . . . . .

Annual Reports of Pioneer and

Financial Statements of Multi-Credit . . . . .

June 12, 1987 Newspaper Article . . . . . . .

August 28, 1987 Memorandum . . . . . . . . . .

Paragraph 152 of the Stipulation of Facts . .

Respondent's Motion To Compel

Production of Documents . . . . . . . . . . . . . .

- 3 II.

General Principles Applicable to These Cases . . . . . . 93

Taxation of Interest Received by

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

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

III. Positions of the Parties With Respect

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

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

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

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

Petitioner's Principal Arguments . . . . 107

Petitioner's Alternative Arguments . . . 110

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

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

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

IV.

Resolution of Certain Questions That Relate

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

Resolution of Certain Questions That

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

Relationships Among the Persons

Involved in the Transactions at Issue . . . . 113

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

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

Purpose for the Form of Each

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

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

Pledging Collateral . . . . . . 128

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

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

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

Resolution of Certain Questions That

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

Whether the Binding Commitment Test

of the Step Transaction Doctrine

Applies to Any of the Bank Transactions . . . 136

Whether the Role of the Banks in

Question in the Bank Transactions

- 4 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

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

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

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

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

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

UB $570,000 Pre-March 1984 Loan and

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

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

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

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

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

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

VI.

Petitioner's Constitutional and

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

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

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

Petitioner's Claim That He Was Singled Out

Based on Constitutionally Impermissible

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

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

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

Should Not Be Applied Retroactively . . . . . 189

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:

- 5 -

Year Deficiency

Additions to Tax or Penalties

Section

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

1984

1985

1986

$16,366

31,085

46,546

$65,466

124,338

186,183

$3,273

6,217

$ --9,309

--*

$6,547

12,434

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:

Year Deficiency

Additions to Tax or Penalties

Section

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

1984

1985

1986

$23,938

23,435

8,945

$95,751

93,739

35,778

$4,788

4,687

$ --1,789

--*

$9,575

9,374

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

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.

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.

- 6 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?

(4)

We hold that she did not.

Did respondent abuse her discretion by making the

withholding tax determinations that we have sustained against

Radcliffe and BOT?

(5)

We hold that she did not.

Are Radcliffe and BOT liable for the additions to tax

for failure to file timely required withholding tax returns?

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?

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.

- 7 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.

General and Background

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

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.

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

objections below.

- 8 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.

- 9 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 rele-

vant 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.

Certain Foreign Corporations That Pledged

Cash Collateral in the Transactions at Issue

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

- 11 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.

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.

- 12 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.

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

president and Ms. Gaw was its secretary and treasurer.

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.

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 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

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.

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.

- 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.

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 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

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.

- 16 were susceptible to influence by, petitioner, Mme. Koo,

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

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.

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

- 17 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

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.

- 18 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

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.

- 19 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:

Period

Actual Interest

Rate Percentage

May 17, 1984, until June 25, 1984

June 25, 1984, until Oct. 1, 1984

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

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

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

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

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

Jan. 2, 1985, until May 17, 1985

14.00

14.50

14.25

14.00

12.75

12.50

12.25

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-

The June 4, 1985 interest payment also included interest paid

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

- 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 re-

newed 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:

Period

May 17, 1985, until July 1, 1985

July 1, 1985, until Apr. 1, 1986

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

Apr. 28, 1986, until May 17, 1986

Actual Interest

Rate Percentage

10.75

10.25

9.75

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 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

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.

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...)

- 22 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, peti-

tioner 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

(...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.

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.

- 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

Rate Percentage

Period

May

16, 1986, until Sept. 10, 1986

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

9.25

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.)

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.

loan was due on June 11, 1986.

That

The proceeds of BB $1,625,000

- 24 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

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.

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.

- 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 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

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.

- 27 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-

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.

- 28 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.

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.

- 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 certifi-

cates 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 cer-

tificate of deposit was paid on September 12, 1986.

(Herein-

after, 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.)

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 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 certifi-

cate 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 inter-

est 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

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.

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.

- 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.

Jan.

Feb.

Mar.

Apr.

May

11, 1985

13, 1986

11, 1986

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 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

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

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...)

- 35 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

(...continued)

Merit.

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.

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...)

- 36 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

(...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.

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

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

- 37 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.

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.

- 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 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.)

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.

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.

- 40 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

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

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

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 195196.

- 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 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:

Period

Apr. 15, 1985, until May 20, 1985

May 20, 1985, until June 18, 1985

June 18, 1985, until Mar. 7, 1986

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

Percentage

Interest Rate

11.5

11.0

10.5

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

The Apr. 22, 1986 interest payment also included interest

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

- 43 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 re-

newals of that loan will be referred to collectively as the UB

$325,000 loan.)

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

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

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

(continued...)

- 44 loan was due on April 10, 1986.

To document that loan, peti-

tioner 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

(...continued)

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

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.

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.

- 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 per-

centage 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 Interest Rate

on Fixed Time Deposits

Term of Fixed Time Deposits

June 27, 1985, until July 30, 1985

July 30, 1985, until Aug. 30, 1985

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

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

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

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

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

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

7.50

7.75

7.8125

8.00

7.875

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.

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.

- 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:

Term of Fixed Time Deposits

Interest Rate

on Fixed Time Deposits

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

Apr. 7, 1986, until May

8, 1986

May

8, 1986, until June 9, 1986

June 11, 1986,* until July 10, 1986

7.6875

7.7 to 6.7

6.6875

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 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.)

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

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.

- 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 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:

15, 1985, April 10, 1986, and July 10, 1986.

April

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.

Interest on the original Mandalay $1,300,000 CD was paid on

Aug. 16, 1984, and Sept. 17, 1984.

- 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.

(Herein-

after, 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 origi-

nal 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.

Through-

out 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 certifi-

cate 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 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 origi-

nal 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.)

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

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.

- 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 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

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.

- 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.

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

1985

1986

($809,615)

(835,080)

(894,322)

$93,026

(168,669)

(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

1985

1986

$73,791

194,289

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

1985

1986

$144,427

220,171

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

1985

1986

$167,448

233,853

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.

Peti-

tioner 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 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.

Evidentiary Matters

Petitioner has attempted to satisfy his burden of proof

through testimonial and documentary evidence.

principal witness on his behalf.

Petitioner was the

We found him to be glib and at

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.

- 60 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

See Geiger v. Commissioner, 440 F.2d 688, 689-690

testimony.

(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).

generally found the other witnesses who testified to be credible.

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

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.

- 61 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.

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

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.

- 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, 12971298 (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 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.

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,

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...)

- 64 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

(...continued)

District Court for the District of Columbia.

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).

- 65 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.

expected to favor him.

Thus, she would ordinarily be

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-

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.

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.

- 66 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).

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.

- 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.

Peti-

tioner'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 satis-

factorily explained, we may draw an adverse inference from that

witness' absence.

See Pollack v. Commissioner, 47 T.C. at 108.

- 69 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

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...)

- 70 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 testi46

(...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.

- 71 fying.

We conclude that Mme. Koo did not testify at trial be-

cause 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

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

trial, we admitted those exhibits into evidence conditionally,

subject to our ruling on their admissibility.

Petitioner's Income Tax Returns

Petitioner objected in the stipulations on grounds of

relevance to the admission of his individual Federal income tax

Even if we were not to draw such an adverse inference, our

findings and holdings in these cases would not change.

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.

- 72 returns for 1984, 1985, and 1986.

On brief, he does not restate

that objection or advance any argument relating to it.

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.

v. Commissioner, 91 T.C. 524, 566 n.19 (1988).

See Rybak

Consequently, we

unconditionally admit those returns into evidence and make them a

part of the record in these cases.

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.

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 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

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.

- 76 rules, we will not admit them into evidence.50

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

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.

- 77 balance sheet and income statement for the year ended March 31,

1986.

See Rybak v. Commissioner, 91 T.C. at 566 n.19.

Conse-

quently, we unconditionally admit that document into evidence and

make it a part of the record in these cases.

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 there-

fore 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.

at 566 n.19.

See Rybak v. Commissioner, 91 T.C.

Consequently, we unconditionally admit those

documents into evidence and make them a part of the record in

these cases.52

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.

We unconditionally admit Exhibit 15-O as an incomplete copy

(continued...)

- 78 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-

(...continued)

of Pioneer's annual report for the year ended Mar. 31, 1985.

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.

- 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.

pendently admissible.

Each layer of hearsay must be inde-

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;

the general purposes of the rules of evidence and

- 81 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

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.

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...)

- 82 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).

Be-

cause 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.

(...continued)

not allow because of potential prejudice to respondent.

- 83 On the instant record, we conclude that the newspaper article is

not admissible under that rule.56

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.

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

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.

The August 1987 memorandum stated in relevant part that Rev.

Rul. 87-89, supra, provides guidance with respect to "currently

popular international financing structures."

- 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 admis-

sible 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 peti-

tioner 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 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

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.

- 87 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 admis-

sible 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. 8789, 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

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...)

- 88 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.

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

(...continued)

discretion claims in these cases.

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. * * *

- 89 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 ob-

jecting 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,

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...)

- 90 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

(...continued)

uisite to the production of documents.

sioner, 65 T.C. 324, 325-326 (1975).

See Morris v. Commis-

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.]

- 91 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 respon-

dent'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 peti62

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.

- 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.

ed respondent's motion to compel.

The Court therefore grant-

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 sanc-

tion 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 re-

solve 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 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.

Income Tax Regs.

See sec. 861(a)(1); sec. 1.861-2(a)(1) and (2),

Nor does petitioner dispute respondent's posi-

tion 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

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).

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).

- 95 trade or business within the United States.

The parties there-

fore 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 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-

The tax imposed by sec. 881(a) may also be reduced or eliminated by treaty. Sec. 894(a).

- 97 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),

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.

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).]

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).

- 98 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

Sec. 881(c)(4) prescribes certain rules in the case of portfolio interest received by a CFC.

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.

- 99 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 main-

tains 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.

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

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. 1.8813(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.

- 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.

U.S. 465, 469-470 (1935).

See Gregory v. Helvering, 293

"To permit the true nature of a trans-

action 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."

Court Holding Co., 324 U.S. 331, 334 (1945).

Commissioner v.

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 co

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