- 90 -
364 U.S. 361 (1960), for example, the Court applied the
Gregory v. Helvering case to disallow an interest deduction. In
so doing, the Court stated that "there was nothing of substance
to be realized * * * from this transaction beyond a tax
deduction." Knetsch v. United States, supra at 366. Similarly,
in Frank Lyon Co. v. United States, 435 U.S. 561 (1978), the
Court stated that economic substance is a necessary requirement
of any transaction. In Frank Lyon, the Court looked to "the
objective economic realities of a transaction rather than to the
particular form the parties employed", id. at 573, and stated
that the Government should honor the allocation of rights and
duties effectuated by the parties "where, as here, there is a
genuine multiple-party transaction with economic substance which
is compelled or encouraged by business or regulatory realities,
is imbued with tax-independent considerations, and is not shaped
solely by tax-avoidance features that have meaningless labels
attached", id. at 583-584.
The Court of Appeals for the Second Circuit applied an
economic substance analysis in Goldstein v. Commissioner,
364 F.2d 734 (2d Cir. 1966), affg. 44 T.C. 284 (1965). In that
case, Mrs. Goldstein won the Irish Sweepstakes. In an attempt to
shelter her winnings from tax, she borrowed from two banks and
invested the loan proceeds in Treasury notes. The loans required
her to pay interest at 4 percent, while some Treasury notes
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