Carl J.D. Bauman and Margaret A. Bauman - Page 18

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          Commissioner, supra; Grodt & McKay Realty, Inc. v. Commissioner,            
          77 T.C. 1221 (1981); Karme v. Commissioner, 73 T.C. 1163 (1980),            
          affd. 673 F.2d 1062 (9th Cir. 1982)                                         
               In evaluating whether a transaction is a sham, the Court of            
          Appeals for the Ninth Circuit, to which this case is appealable,            
          applies a two-factor test.  The analysis requires an examination            
          of both the objective and subjective aspects of the transaction.            
          The objective factor focuses on whether the transaction would               
          have been likely to produce economic benefits aside from tax                
          benefits.  The subjective analysis focuses on whether the                   
          taxpayer entered into the transaction with a bona fide business             
          purpose other than tax avoidance.  Bail Bonds by Marvin Nelson,             
          Inc. v. Commissioner, supra.  The Court of Appeals, however, does           
          not apply these two factors in a rigid fashion.  Sochin v.                  
          Commissioner, 843 F.2d 351 (9th Cir. 1988), affg. Brown v.                  
          Commissioner, 85 T.C. 968 (1985).  Instead, both factors are                
          viewed in a manner intended to aid the court’s traditional                  
          analysis with respect to alleged sham transactions.  The                    
          underlying objective is to determine whether the transaction had            
          any practical economic effects other than the creation of tax               
          losses.  Id.                                                                
               In the instant case, respondent determined that ERL’s lease            
          transaction lacked economic substance.  Accordingly, petitioners            
          have the burden of proving that respondent’s determination is               
          erroneous.  Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).           

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