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Santa Cruz. After 4 weeks, 3-Koam determined that the games did
not attract sufficient customers and had no residual value; it
then abandoned the purported plan to distribute the games.
Finally, 3-Koam never attempted to sell the games in an effort to
recoup some of its alleged $90,000 investment.
The absence of arm's-length dealings among the parties, for
example, where two entities under common ownership are involved
in a "money movement transaction" is a factor often present in
sham transactions. Karme v. Commissioner, 73 T.C. 1163, 1186
(1980), affd. 673 F.2d 1062 (9th Cir. 1982). In Karme, taking
into account the relationship between the two parties, we found
that the taxpayer was not genuinely at risk for any money,
despite purported indebtedness between the entities. Id. at
1189. Two of 3-Koam's partners formed Inkax for the alleged
purpose of marketing video games for 3-Koam; plainly the
partnerships are closely related.
On its 1990 Form 1065, 3-Koam deducted a $90,000 research
and development expense; however, neither 3-Koam nor Inkax ever
paid Dooyong for its development efforts.5 More importantly,
5 At trial and on brief, 3-Koam claims that Inkax's failure to
pay Dooyong has absolutely no bearing on the propriety of the
accrual by 3-Koam of the $90,000 research and development
expenditure, because the taxpayer here is 3-Koam, not Inkax. As
such, petitioner argues that 3-Koam properly "paid or accrued"
the amount claimed as a deduction pursuant to sec. 461(a).
However, accounting methods or descriptions, without more, do not
lend substance to that which has no substance. Frank Lyon Co. v.
United States, 435 U.S. 561, 577 (1978) (citing Commissioner v.
(continued...)
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