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We inquire first whether the minimum annual royalty and the
intangible drilling expense deductions are grossly erroneous as
having no basis in fact or law because they arose from a sham
transaction entered into solely for the purpose of obtaining
favorable tax consequences. Sham transactions are not given
effect for Federal income tax purposes, Frank Lyon Co. v. United
States, 435 U.S. 561, 573 (1978); Ferrell v. Commissioner, 90
T.C. 1154, 1199 (1988), and the claimed deductions arising
therefrom are “phony” or “frivolous”, without basis in fact or
law, and therefore grossly erroneous under section 6013(e)(2),
even if an expense or loss is actually incurred. See, e.g.,
Bouskos v. Commissioner, T.C. Memo. 1987-574 (deductions arising
from coal-mining lease that was “a mere tax shelter designed to
enrich the general partners and provide sizable tax deductions to
the limited partners” were phony and had no basis in law or fact)
(quoting Tallal v. Commissioner, T.C. Memo. 1984-486, affd. 778
F.2d 275 (5th Cir. 1985)); cf. Somervill v. Commissioner, T.C.
Memo. 1996-165 (claimed deductions in tax shelter that was a sham
were not grossly erroneous because they were “not without some
support in the case law”) (quoting Finkelman v. Commissioner,
T.C. Memo. 1989-72, affd. without published opinion 937 F.2d 612
(9th Cir. 1991)).
The putative innocent spouse must carry the burden of
producing evidence of the sham nature of the underlying
transaction and the lack of profit motive on the part of the
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