- 8 -
Casebeer v. Commissioner, 909 F.2d 1360 (9th Cir. 1990), affg.
T.C. Memo. 1987-628, affg. Larsen v. Commissioner, 89 T.C. 1229
(1987), affg. Sturm v. Commissioner, T.C. Memo. 1987-625, affg.
Moore v. Commissioner, T.C. Memo. 1987-626; Rice's Toyota World,
Inc. v. Commissioner, 81 T.C. 184, 196 (1983), affd. in part on
this issue, revd. in part 752 F.2d 89 (4th Cir. 1985). However,
it is well settled that the substance of a transaction and not
the form will control its tax consequences. Frank Lyon Co. v.
United States, 435 U.S. 561, 573 (1978). A transaction entered
into solely for the purpose of tax reduction, which is devoid of
economic, commercial, or legal purpose other than the expected
tax benefits, is a sham without effect for Federal income tax
purposes. Id.; Rice's Toyota World, Inc. v. Commissioner, supra
at 196. In Rice, we stressed that where "a taxpayer, cognizant
of potential tax benefits, enters into a transaction of
questionable economic worth, the tests developed under the sham
transaction doctrine are applied to determine whether a threshold
level of business purpose and economic substance is present."
Id.
After careful consideration of all the facts in this case,
we conclude that the transfer of the $90,000 from 3-Koam to Inkax
is not a bona fide outlay for research and development, because
the transaction lacks sufficient economic substance. The record
shows that there is little, apart from tax considerations, to
justify 3-Koam's entry into the purported research and
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