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Also, under a treaty between the United States and the
Netherlands (U.S.-Netherlands Treaty), interest payments made by
U.S. taxpayers to Netherlands corporations are exempt from tax by
the United States. See Supplementary Convention on Taxes on
Income and Other Taxes, Dec. 30, 1965, U.S.-Neth., art. VI, 17
U.S.T. 896, 901.
U.S. tax laws and treaties, however, do not recognize as
valid for tax purposes sham transactions or transactions that
have no economic substance. See Gregory v. Helvering, 293 U.S.
465, 470 (1935); Johansson v. United States, 336 F.2d 809, 813
(5th Cir. 1964). Even legitimate corporations may engage in sham
transactions. See Knetsch v. United States, 364 U.S. 361, 366
(1960).
Also, under various applications of the step-transaction
doctrine, a series of formally separate steps may be collapsed
and treated as a single transaction. See Penrod v. Commissioner,
88 T.C. 1415, 1428 (1987). A series of steps may be collapsed
and treated as one if at the time the first step was entered into
there was a binding commitment to undertake the later step
(binding-commitment test), if separate steps constitute
prearranged parts of a single transaction intended to reach an
end result (end-result test), or if separate steps are so
interdependent that the legal relations created by one step would
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