- 42 -
borrower and lender is not dispositive of whether interest
arising from that debt is deductible under section 163. Rather,
the overall transaction, of which the debt is a part, must have
economic substance before interest can be deducted. See Lee v.
Commissioner, supra at 587; United States v. Wexler, supra at
125. If this were not the rule, every tax shelter, no matter how
transparently sham, could qualify for an interest expense
deduction as long as there was a real creditor in the transaction
that demanded repayment. Such a result would be "contrary to the
longstanding jurisprudence of sham shelters from Knetsch on
down." Lee v. Commissioner, supra at 587.
In determining whether a transaction or series of related
transactions constitute a substantive sham, both this Court and a
majority of the Courts of Appeals have utilized a flexible
analysis that focuses on two related factors, economic substance
apart from tax consequences, and business purpose. See ACM
Partnership v. Commissioner, supra; Karr v. Commissioner, 924
F.2d 1018, 1023 (11th Cir. 1991); accord Casebeer v.
Commissioner, 909 F.2d 1360 (9th Cir. 1990), affg. in part and
revg. in part on another ground Larsen v. Commissioner, 89 T.C.
1229 (1987); James v. Commissioner, 899 F.2d 905, 908-909 (10th
Cir. 1990), affg. 87 T.C. 905 (1986); Shriver v. Commissioner,
899 F.2d 724, 727 (8th Cir. 1990), affg. T.C. Memo. 1987-627;
Page: Previous 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 NextLast modified: May 25, 2011