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II. Section 162 Deductions
Having held that petitioner's restructuring of its excess
value activity constituted a sham transaction that had no
economic effect, we are presented with the question of whether
petitioner is entitled to deduct the amounts retained by NUF.
The amounts retained consisted of NUF's "commission" of $1
million plus allowances for various costs.
Section 162 allows as a deduction all ordinary and necessary
expenses paid or incurred during the taxable year in carrying on
any trade or business. See sec. 162(a). However, expenses
incurred in furtherance of a sham transaction are not deductible.
As stated by the Court of Appeals for the Eleventh Circuit in
Kirchman v. Commissioner, 862 F.2d at 1490:
The sham transaction doctrine requires courts and
the Commissioner to look beyond the form of a
transaction and to determine whether its substance is
of such a nature that expenses or losses incurred in
connection with it are deductible under an applicable
section of the Internal Revenue Code. If a
transaction's form complies with the Code's
requirements for deductibility, but the transaction
lacks the factual or economic substance that form
represents, then expenses or losses incurred in
connection with the transaction are not deductible.
The Court of Appeals for the Second Circuit recently addressed a
similar issue with respect to interest deductions under section
59(...continued)
v. Commissioner, 429 F.2d 650 (2d Cir. 1970), revg. and remanding
51 T.C. 251 (1968).
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