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[T]he risk that parties to a tort suit will
allocate away the State’s interest can be
avoided either by obtaining the State’s
advance agreement to an allocation or, if
necessary, by submitting the matter to a
court for decision.
Id. at ___, 126 S. Ct. at 1765 & n.17 (emphasis added).
We view with some skepticism the Commissioner’s fear that
upholding the deductibility of the loan repayment here will
trigger a massive recharacterization of settlement proceeds as
intrafamily loans in the future. But we take cases one at a
time, and here the facts persuade us that Clyde’s loan had real
substance--it was concededly valid under Ohio law, and resulted
in the creation of real interest income on which he really did
pay tax. We are particularly persuaded by the evidence that the
Hickses were trying very hard to comply with the complex
Medicaid-eligibility rules in settling the trusts. As the
Supreme Court said in a leading opinion on substance-over-form,
where, as here, there is a genuine multiple-
party transaction with economic substance
which is compelled 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 * * *.
Frank Lyon Co. v. United States, 435 U.S. 561, 583-84 (1978).
We therefore honor the allocation disputed here, and find
that the $1 million loan was bona fide and for adequate and full
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