attributable to the income from the investment claimed in a given
taxable year to offset taxes on income from other sources that
year.
In the tax shelter line of cases, the Court of Appeals for
the Sixth Circuit has held that a transaction is a sham if it has
no practicable economic effects other than the creation of income
tax losses. Pasternak v. Commissioner, supra; Illes v.
Commissioner, supra. The first prong of the Mahoney test
requires an examination of the transaction, not the taxpayer.
Illes v. Commissioner, supra at 165. A taxpayer’s alleged
reasonable belief that his or her investment in a tax shelter had
economic substance does not preclude treatment of the transaction
as a sham. Id.
Thus, our first inquiry is whether the master recording
lease transaction entered into between Encore and petitioner had
economic substance or whether it was a sham. Several factors
have been used to determine whether a transaction has economic
substance. One such factor is evidence that the transaction was
marketed as a tax shelter generating little revenue. See
Pasternak v. Commissioner, supra at 901. Encore’s 24-page
prospectus focuses primarily on the tax advantages of investing
in the Encore program and contains only a brief description of
the recording industry. The prospectus does not describe the
specific master recordings Encore intended to lease, or the
nontax, economic profitability of Encore’s leasing program. The
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011