SHAM TRANSACTIONS: DO
YOU KNOW ONE WHEN YOU SEE IT?
Justice Potter Stewart
once had great difficulty describing pornography, but uttered the inimitably
pithy phrase about knowing pornography when we see it. I’m not sure the
same can be said for sham transactions, something that, in an odd way,
might be viewed as a type of pornography by the Service. After all, the
Service surely considers sham transactions as unwholesome, destructive,
and morally corrupt. I suppose tax shelters could fit this description,
too, but let’s stick to the topic.
Like some of the other
amorphous doctrines that get bandied about from time to time, including
the broad notion of “economic substance” and the more specific (and therefore
a little less annoying) step transaction doctrine, the sham transaction
doctrine is a repository for old lore. The applicable law (if one can elevate
the status of these authorities to call it that) becomes murkier still
when one tries to apply the related code sections that are often seen as
substitutes for this doctrine. Much like Section 111 of the Code attempting
to codify (at least in part) the tax benefit doctrine, Section 269 was
meant (at least in part) to codify the IRS’ ability to just say no.
Understandably, business
purpose, economic substance and sham transactions all get mixed up in a
particular kind of stew. Recently, we talked about some authority in the
making, Nicole Rose Corp. f/k/a Quintron Corp. v. Commissioner, 2d Cir.
Dkt. No. 02-4110 (Aug. 1, 2002). See Wood, “Business Purpose and Economic
Substance: Catch Me If You Can,” Vol. 11, No. 4, M&A Tax Report (Nov.
2002), p. 5. The IRS also came out with a helpful Field Service Advice,
FSA 200238045, an analysis that melds together the business purpose doctrine,
the economic substance requirement, and the Service’s statutory authority
under Section 269.
Here at The M&A Tax
Report, we like getting mail. Recent reader comments suggest that an analysis
of this uneasy triumvirate is warranted. In a future issue we’ll delve
into this important (but messy) topic.
Sham Transactions:
Do You Know One When You See It?, Vol. 11, No. 6, M&A Tax Report
(January 2003), p. 7.