- 94 -
recognized for tax purposes they must have economic substance."
Id. at 52.
More recently, the Third Circuit reiterated that "[t]he
general rule on sham transactions in this circuit is well-
established: 'If a transaction is devoid of economic substance
* * * it simply is not recognized for federal taxation purposes,
for better or for worse. This denial of recognition means that a
sham transaction, devoid of economic substance, cannot be the
basis for a deductible loss.'" United States v. Wexler, 31 F.3d
117, 122 (3d Cir. 1994) (quoting Lerman v. Commissioner, supra at
45). In Wexler, the taxpayer claimed deductions resulting from
financial arrangements known as "repo to maturity" transactions.
Id. at 118. The taxpayer argued that the economic substance
doctrine did not apply to the deduction of interest payments
pursuant to section 163 if the taxpayer's obligation to pay the
interest is binding and enforceable. Id. at 122. The Third
Circuit analyzed a series of related cases and noted that the key
requirement that permeated each of those cases was that the
financial transaction be "economically substantive". Id. at 127
(emphasis omitted). The Third Circuit stated that "transactions
with no economic significance apart from tax benefits lack
economic substance." Id. at 124.
The "principle laid down in the Gregory case is not limited
to corporate reorganizations, but rather applies to the federal
Page: Previous 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 NextLast modified: May 25, 2011