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economic substance, or lacks a profit motive. Douglas v. Commis-
sioner, 86 T.C. at 762; Michaels v. Commissioner, T.C. Memo.
1995-294.
We may consider the terms of a stipulated settlement in
determining whether partnership losses are grossly erroneous.
However, we do not draw an inference that the partnership losses
are grossly erroneous where the stipulation is silent as to
whether the partnership transaction was a sham. Michaels v.
Commissioner, supra.
Petitioner asserts that Thomas Dillon invested in Supertaps
merely to obtain tax losses and not to obtain a positive return
on the investment. Therefore, petitioner concludes that the loss
deductions from Supertaps do not qualify as deductible expenses
under well-settled legal principles, and there is no basis in law
for the allowance of the loss deductions.
Sham transactions are not given effect for Federal income
tax purposes, Frank Lyon Co. v. United States, 435 U.S. 561, 573
(1978), and the resulting deductions are phony and without basis
in fact or law. In this regard, petitioner has the burden of
producing evidence concerning the sham nature of the underlying
transaction and the lack of profit motive on the part of the
entity and its principals. Here, petitioner must establish that,
at the partnership level, Supertaps was a sham transaction with-
out a profit motive. Hulter v. Commissioner, 91 T.C. 371, 393
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