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the basis that "Manver gave up the right to substantial pay-as-
you-go royalties for several years and instead received cash and
promissory notes."
With respect to the guarantee fees, petitioners argue that,
because the guarantee fees paid on the commercial paper "did not
exceed the amounts that would be charged by an unrelated party,
those fees were reasonable for purposes of section 162(a) and
consistent with arm's-length amounts for purposes of section
482."
Respondent contends that there was no genuine indebtedness
underlying the interest payment, as required by section 163, and,
therefore, the transactions were shams. Respondent asserts that
the transactions lacked economic substance and were entered into
solely for tax-avoidance purposes. Respondent further contends
that there was no economic substance to the guarantee fees
because there was no bona fide debt to guarantee and because the
guarantor controlled the ability of petitioners to repay the debt
and the ability of the creditor to enforce the debt and the
guarantee.
For interest to be deductible under section 163(a), it must
be paid on genuine indebtedness, i.e., an indebtedness in
substance and not merely in form. Knetsch v. United States, 364
U.S. 361, 366 (1960). Transactions that lack economic substance
and are conducted for the sole purpose of reducing tax liability
are disregarded as shams by the courts. Knetsch v. United
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