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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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