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or encouraged by business or regulatory realities, is
imbued with tax-independent considerations, and is not
shaped solely by tax-avoidance features that have
meaningless labels attached, the Government should
honor the allocation of rights and duties effectuated
by the parties. * * *
After the Supreme Court issued its opinion in Frank Lyon
Co., several Courts of Appeals reduced the Frank Lyon Co.
formulation to a multipart test. However, the Courts of Appeals
do not agree whether the various parts are merely factors in
deciding whether a transaction is a sham for tax purposes or are
the exclusive elements for determining whether a transaction
meets the Frank Lyon Co. formulation. In Rice’s Toyota World,
Inc. v. Commissioner, 752 F.2d 89, 91 (4th Cir. 1985), affg. in
part, revg. in part and remanding 81 T.C. 184 (1983), the Court
of Appeals for the Fourth Circuit held that Frank Lyon Co.
requires the use of a two-part inquiry to ascertain whether a
transaction has economic substance or is a sham that will not be
recognized for tax purposes. It articulated the inquiry as
follows:
To treat a transaction as a sham, the court must find
that the taxpayer was motivated by no business purposes
other than obtaining tax benefits in entering the
transaction, and that the transaction has no economic
substance because no reasonable possibility of a profit
exists. [Id.]
In contrast, in ACM Pship. v. Commissioner, 157 F.3d 231, 247 (3d
Cir. 1998), affg. in part, revg. in part, dismissing in part and
remanding T.C. Memo. 1997-115, the Court of Appeals for the Third
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