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Circuit treated the business purpose and reasonable possibility
of profit prongs as factors to be considered in determining
whether a transaction is a sham for tax purposes, stating that
these distinct aspects of the economic sham inquiry do
not constitute discrete prongs of a “rigid two-step
analysis,” but rather represent related factors both of
which inform the analysis of whether the transaction
had sufficient substance, apart from its tax
consequences, to be respected for tax purposes. * * *
[Id.]
See also James v. Commissioner, 899 F.2d 905, 908-909 (10th Cir.
1990), affg. 87 T.C. 905 (1986).
This case is appealable, barring a stipulation to the
contrary, to the Court of Appeals for the Fifth Circuit. In
Compaq Computer Corp. & Subs. v. Commissioner, 277 F.3d 778 (5th
Cir. 2001), revg. 113 T.C. 214 (1999), the Court of Appeals
declined to decide whether business purpose and the reasonable
possibility of profit were the exclusive elements of a Frank Lyon
Co. inquiry or simply factors to be considered in a Frank Lyon
Co. inquiry, because it concluded that the transaction at issue
there had both a realistic possibility of generating a profit and
a business purpose. Nevertheless, Compaq Computer Corp. confirms
that the Frank Lyon Co. formulation is controlling. A
transaction will not be respected for Federal tax purposes if it
lacks a business purpose and a reasonable possibility of
generating a profit independent of tax considerations.
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