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substance in the section 453 investment strategy.19 We are
convinced that tax avoidance was the reason for the partnership's
purchase and sale of the Citicorp Notes. We do not suggest that
a taxpayer refrain from using the tax laws to the taxpayer's
advantage. In this case, however, the taxpayer desired to take
advantage of a loss that was not economically inherent in the
object of the sale, but which the taxpayer created artificially
through the manipulation and abuse of the tax laws. A taxpayer
is not entitled to recognize a phantom loss from a transaction
that lacks economic substance.
In analyzing whether the CINS transaction had economic
substance, we have been mindful that for some businesses there is
little, if any, meaningful difference between an improvement in
financial performance achieved by cutting operating expenses and
one that results from reducing taxes. Both reductions improve
the financial statement. The tax law, however, requires that the
intended transactions have economic substance separate and
distinct from economic benefit achieved solely by tax reduction.
The doctrine of economic substance becomes applicable, and a
judicial remedy is warranted, where a taxpayer seeks to claim tax
19 We need not, and do not, delve into the appropriateness
of reporting the transaction on the installment method. We are
compelled to note, however, that the installment method reports
income, sec. 453(a), and the partnership sold the Citicorp Notes
for consideration equal to the notes' purchase price.
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