- 92 -
Goldstein's indebtedness was enforceable with full recourse and
her investments were exposed to market risk. Yet, the strategy
was not consistent with rational economic behavior in the absence
of the expected tax benefits. Other courts have applied the
teaching of Goldstein in varied settings. In Sheldon v.
Commissioner, 94 T.C. 738 (1990), for example, this Court
analyzed the financial transactions in issue there in a manner
similar to that employed in Goldstein. The Court first
determined that the transactions at issue were real, rather than
fictitious. The Court then evaluated economic substance, stating
that "the principle of * * * [Goldstein] would not, as
petitioners suggest, permit deductions merely because a taxpayer
had or experienced some de minimis gain." Id. at 767. The Court
held that a transaction resulting in gain that was
"infinitesimally nominal and vastly insignificant when considered
21(...continued)
fictitious. In Rice's Toyota World, Inc. v. Commissioner,
752 F.2d 89 (4th Cir. 1985), affg. in part and revg. in part
81 T.C. 184 (1983), the Court of Appeals for the Fourth Circuit
concluded that a transaction was a sham because it lacked
business purpose and economic substance. In Lerman v.
Commissioner, 939 F.2d 44, 53-54 (3d Cir. 1991), affg. Fox v.
Commissioner, T.C. Memo. 1988-570, the Court of Appeals for the
Third Circuit adopted the Second Circuit's definition of a sham
transaction as "a transaction that 'is fictitious or * * * has no
business purpose or economic effect other than the creation of
tax deductions.'" (quoting DeMartino v. Commissioner, 862 F.2d
400, 406 (2d Cir. 1988), affg. 88 T.C. 583 (1987)). The CINS
transaction was not a sham in the sense that it was fictitious
but it was a sham in the sense that the sec. 453 investment
strategy lacked economic substance.
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