- 107 -
163. In Lee v. Commissioner, 155 F.3d 584 (2d Cir. 1998), affg.
in part and remanding in part on another ground T.C. Memo. 1997-
172, the taxpayers had entered into a sham investment transaction
solely for the purpose of claiming tax deductions. See id. at
586. The taxpayers argued that interest arising from
economically empty transactions may still be deducted so long as
the debt itself has economic substance. The Court of Appeals for
the Second Circuit declined to accept the taxpayers' argument and
held that in order for an interest deduction to be valid under
section 163, the underlying transaction must have economic
substance. See id. at 587. In Brown v. Commissioner, 85 T.C.
968 (1985), affd. sub nom. Sochin v. Commissioner, 843 F.2d 351
(9th Cir. 1988), we held that deductions claimed by the taxpayers
were not allowable because they were connected to sham
transactions.
We have found that petitioner's restructuring of its EVC
activity was a sham set up to reduce tax. Following the
reasoning in cases such as Kirchman v. Commissioner, supra; Lee
v. Commissioner, supra; and Brown v. Commissioner, supra, we hold
that the amounts retained by NUF are not deductible.
III. Liberty Transaction
Respondent disallowed deductions taken by petitioner for
premiums paid to Liberty Mutual Fire for California workers'
compensation and employers' liability insurance coverage.
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