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Federal income tax return, and respondent disallowed petitioner’s
$8,953,708 claimed net operating loss carryback deduction to 1992
and to 1993. Respondent did not disallow the $2,118,644 claimed
capital loss relating to petitioner’s transfer to Wildervank of
the Cove common stock.
OPINION
Taxpayers have a legal right to structure transactions to
minimize their tax obligations. Gregory v. Helvering, 293 U.S.
465, 469 (1935). A transaction, however, entered into solely for
tax avoidance without economic, commercial, or legal effect other
than expected tax benefits constitutes an economic sham without
effect for Federal income tax purposes. Frank Lyon Co. v. United
States, 435 U.S. 561, 573 (1978); Gilman v. Commissioner, 933
F.2d 143, 147-148 (2d Cir. 1991), affg. T.C. Memo. 1990-205;
Rice’s Toyota World, Inc. v. Commissioner, 81 T.C. 184, 196
(1983), affd. in part and revd. in part 752 F.2d 89 (4th Cir.
1985).
Whether we respect a taxpayer’s characterization of a
transaction depends upon whether the characterization represents
and is supported by a bona fide transaction with economic
substance, compelled or encouraged by business or regulatory
realities, and not shaped solely or primarily by tax avoidance
features that have meaningless labels attached. Frank Lyon Co.
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