- 108 -
in an investment vehicle known as the "Karme Trust".) The
taxpayer, however, deducted the $60,000 interest payment from his
income taxes for 1969. On the facts of the case, we found that
the loan transaction was a sham. We stated:
When the transfer of $600,000 from Alms to
petitioner is viewed as a part of the entire money
movement transaction, it becomes apparent that Alms was
not a true lender but was a mere conduit in the
circulation of the Union Bank loan proceeds back to
petitioner and the Union Bank. * * * [W]e believe
that no purpose, from anyone's standpoint, has been
shown for the transfer of the $600,000 from World
Minerals back to Alms. There is no reason to presume
that the World Minerals-Alms transaction was conducted
at arm's length since both entities were effectively
controlled by Margolis. * * * Although the payment
from Alms to petitioner was designed to appear to be a
loan, its main effect was simply to complete the
circuit so that petitioner could repay the Union Bank
Loan. * * * [Id. at 1186-1187; fn. ref. omitted.]
Also instructive is United States v. Clardy, 612 F.2d 1139
(9th Cir. 1980), in which the Court of Appeals affirmed the
conviction of a tax shelter promoter. One of the counts against
the promoter was based on the following three-step circular
arrangement:
1. On December 30, 1971, the promoter directed
that a check for $30,000, payable to his company EPI,
be drawn on a client trust account, No. 13030, called
"Associates". The check bore a legend stating that it
was "prepaid interest" of the client. The client's
balance in the Associates account was $180.86. The
check was nevertheless immediately deposited in the EPI
account.
2. On the same day, EPI drew a check on its
account for $30,000 payable to "Capital Three", which
is another name for Associates. The check was
deposited into a separate Associates account, No.
13022.
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