- 28 -
Respondent disallowed the processing fees on the grounds
that the transactions were shams lacking a business purpose and
economic substance. Petitioners, however, argue that the
separate corporate entity status of Northwest should be
recognized, citing the test in Moline Properties, Inc. v.
Commissioner, 319 U.S. 436 (1943), and the line of cases resting
thereon.
We are not required to find Northwest was a sham in order to
uphold respondent's determinations. The notice of deficiency
focuses on the sham nature of the transactions rather than the
sham nature of the corporation.
A "sham" transaction is one that lacks economic substance
beyond the creation of tax benefits. Knetsch v. United States,
364 U.S. 361, 365-366 (1960); Karr v. Commissioner, 924 F.2d
1018, 1022-1023 (11th Cir. 1991), affg. Smith v. Commissioner, 91
T.C. 733 (1988). Petitioners bear the burden of proving that the
challenged transactions were not shams. Rule 142(a); Sheldon v.
Commissioner, 94 T.C. 738, 753 (1990).
Alternatively, petitioners appear to argue that the proper
test for sustaining the deduction of the processing fee is the
test in Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221,
1237-1238 (1981). In Grodt, we set forth eight factors by which
to determine whether the benefits and burdens of ownership have
Page: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 NextLast modified: May 25, 2011