Cherin v. CommissionerCherin v. Commissioner
Lead Opinion
Respondent determined deficiencies in petitioner’s Federal income tax for the years and in the amounts as follows:
Years Amount
1972. $27,425
1973. 18,905
1974. 13,191
1975. 2,740
1976. 1,586
1977. 185
1978. 1,416
By amendment to the answer, respondent asserts that the deficiencies constitute substantial underpayments attributable to tax-motivated transactions within the meaning of section 6621(c),
FINDINGS OF FACT
Some of the facts have been stipulated and they are so found. Petitioner’s residence at the time of the filing of this petition was in Hialeah, Florida.
In and prior to 1971, petitioner’s principal business was the management of beauty shops. In 1971, petitioner separated from his wife and allocated to her for her support many of the income-producing properties which comprised his beauty shop business. He also anticipated retirement upon reaching the age of 65 in 1975. Petitioner was looking for an investment which would produce significant income for his retirement years, when his income from other sources was expected to be materially reduced. In due course, petitioner inquired of Nathan Newman, an accountant, financial advisor, and attorney, who had been assisting petitioner for approximately 20 years, as to possible investments. Newman was then aware of the Southern Star program, and apparently had an arrangement with Southern Star for payment of a finder’s fee for investors in the program produced by him, a fact which petitioner did not discover until long after his investments had been made. Newman recommended that petitioner invest in the Southern Star program, which was described by him to petitioner as one which would not require petitioner’s personal attention, and would produce a regular income after retirement. Newman showed to petitioner a projection showing receipt of regular income after 1975. The projection had been prepared by a Mr. Levine who was described as a friend.
On June 1, 1971, petitioner and Southern Star entered into a sales agreement providing for the purchase
The parties have primarily sought to focus on the distinctions from and similarities to the facts in Hunter, Siegel, and Jacobs. Therefore, a discussion of Southern Star and its cattle program is a necessary background. Southern Star was organized in 1970 by Neil Levine and Harry Epstein.
The purchase price of petitioner’s first herd was $62,500
Petitioner’s second herd of five cows and a two-thirds interest in a bull (which actually turned out to be 2 one-third interests in two bulls) had a purchase price of $32,500. The downpayment was $1,000, and the balance was to be paid from 30 percent of the proceeds from the sales of cattle. The cows cost $2,500 each, and the bull was again valued at $30,000. Interest was required to be paid monthly
During 1971, petitioner paid in cash, interest, as well as principal and maintenance. Principal payments on the first herd were made through 1974, aggregating $15,900. No payments were made after 1975, and the payments in that year of interest and for management were less than $200. Petitioner continued to make the specified payments of principal through 1974, although he was aware of continuing deficiencies in Southern Star’s management of the herds. He complained repeatedly about the inadequate calf crops, the failure to observe the 80-percent live birth guarantee,
The animals allocated to petitioner’s herds were of inferior quality, many having been purchased by Southern Star from the Black Watch Farm, a somewhat similar program which went into bankruptcy. The cows in petitioner’s herds were worth no more than the average auction sale prices of Aberdeen Angus cattle during this period, $468 in 1971, and $526 in 1972. The bulls allocated to the herds were worth approximately $647 in 1971, and $740 in 1972.
In 1981, Southern Star ceased business. It purported to recognize a dollar liability to petitioner, but no payments were made to him. No collection efforts were made by petitioner since he believed that Southern Star was without
When petitioner made each of these investments in 1971 and 1972, he contemplated that his payments on the purchase price of the first herd, together with sales of culls and calves, would pay in full the purchase price of that herd by 1976 or 1977, and that the sales revenue generated from both herds would pay the purchase price of the second herd by 1979.
We have compared the sales and management agreements pertaining to petitioner’s two herds with those involved in the Siegel and Hunter cases, and find that the differences in petitioner’s documents are not material. Such differences as do exist are largely between petitioner’s 1971 sales agreement and the Siegel and Hunter sales agreements.
The cows in petitioner’s 1971 herd cost $2,100 each, while in the Siegel herds of 10 cows, each cow cost $2,500. The one-third interest in the bull in each case cost $10,000. For the five cows in petitioner’s second herd, the cost of the females had increased to $2,500 in line with the Siegel prices. Of considerably more significance, petitioner’s 1971 agreement provided, as we have found, for payments on principal in amounts so that within 10 years, $54,000 out of the $62,500 purchase price would have been paid. In Siegel, as well as in Hunter and Jacobs, most of the purchase price was reflected by nonrecourse promissory notes payable during the term of the management agreements only out of that portion of the sales of cattle allocated to the investor. The more important factor is the extent of control over petitioner’s cattle which remained vested in Southern Star pursuant to the management agreements.
General
In Hunter, Siegel, and Jacobs, we held that the purported sales of cattle were so lacking in economic substance as to preclude being treated as sales for Federal income tax purposes and that the benefits and burdens of ownership did not pass to the investor. As we have indicated, our focus in this case is on whether petitioner’s facts are sufficiently different from those in these three earlier cases to warrant a different result.
Petitioner argues that his motives in this case are not suspect, that he was not simply buying tax benefits but he believed that he was buying a herd of cattle which would increase in size and value, eventually including one bull from Southern Star’s prize bull Emulous Bob of K Pride. Hence, petitioner argues, at the end of 10 years his herds would have been substantially more valuable than when he acquired them and would have been fully paid for.
While petitioner’s testimony as to his nontax motives is entitled to some credibility, we place greater weight on objective facts. Dreicer v. Commissioner,
We have never held that the mere presence of an individual’s profit objective will require us to recognize for tax purposes a transaction which lacks economic substance.
Subjective intent cannot supply economic substance to a business transaction. Where, as in the case at bar, we examine the transaction and conclude as we do in this case that Southern Star’s herd investment packages lack any realistic potential for profit, we need not examine the investor’s state of mind. This analysis, where it can be used, avoids the difficult task of weighing dual motives, such as we were forced to undertake in Fox v. Commissioner,
Economic Substance
The material facts with respect to the economic substance of this transaction do not differ significantly from those in Hunter, Siegel, and Jacobs. The initial factor considered by us in Hunter, Siegel, and Jacobs in our determinations that the Southern Star transactions lacked economic substance was “whether the stated price for the cattle is within the reasonable range of their value.” The values determined by us for petitioner’s cattle are the same values we determined for the Southern Star cattle involved in the Siegel case. Thus, as in Siegel, petitioner paid approximately AVz times what the cows were worth in 1971 and in 1972. In the case of the bull, the purchase price was simply exorbitant, representing over 40 times the actual value. Respondent’s expert expressed the opinion that if petitioner had in fact been sold top quality cows from an established cattle herd
The second factor we considered in Hunter, Siegel, and Jacobs is whether there was any intent that the purchase price would ever be paid. We find in this case that at the time petitioner entered into the contracts, he did fully expect the purchase price on both contracts to be paid. In point of fact, however, the purchase price never would have been paid in this case. Petitioner’s interest in the financial results of his investments, and his willingness to follow up with Southern Star, made it predictable that he would stop making principal payments as in fact he did. The poor quality of cattle allocated to petitioner’s contracts, the poor quality of the management provided by Southern Star, and its consistent failure to perform in accordance with its agreement, including its failure to make good on its calf crop warrantee, precluded the sales of culls and calves from contributing to the payments of principal, and petitioner was relying on such sales to augment the principal payments he intended to make. Sales of calves could not contribute materially to liquidation of the purchase price, since the calving rate of the herds was substantially lower
The third factor, petitioner’s control over the cattle purportedly purchased, must be answered in the same fashion as we answered that issue in Hunter, Siegel, and Jacobs. Under the contracts, petitioner in fact had no control over the cattle until the purchase price was paid in full. Further, he had no ability to manage the cattle and no interest in so doing. He never intended at any time to take possession of his cattle. At the end of the term, it was his intent to sell the cattle either directly or through Southern Star.
The final factor, whether petitioner would receive any benefit from disposition of the cattle, must in this case receive the same answer as in other Southern Star cases. Until the purchase price with interest had been paid, petitioner had no right to take possession of the herds or retain any proceeds from their disposition. We have determined that this event would never occur.
Benefits and Burdens of Ownership
In addition, for the reasons which follow, the benefits and burdens of ownership were not in fact transferred to petitioner. Transactions similar to petitioner’s investment in
(1) Whether legal title passes;
(2) how the parties treat the transaction;
(3) whether the purported purchaser acquires any equity in the property;
(4) whether the contract creates a present obligation on the purchaser to make payments;
(5) whether the right of possession is vested in the purchaser;
(6) which party bears the risk of loss or damage to the property; and
(7) which party receives the profits from the sale of the property.
Houchins v. Commissioner,
The first sales agreement entered into by petitioner with Southern Star, in paragraph VII, refers to a separate bill of sale. For some reason, in the corresponding paragraph in the sales agreement dated January 17, 1972, the reference to a bill of sale is omitted. No copies of bills of sale are in this record. In Siegel, the corresponding paragraphs refer to a bill of sale although no bills of sale . were placed in evidence in that case. However, for the purposes of our analysis, we will assume that bills of sale were actually given to petitioner by Southern Star and its subsidiary. Thus, bare legal title may have been transferred,
The parties did not treat the transactions as present sales. Petitioner acquired no rights or obligations and the purported sales had no effect on Southern Star’s unilateral authority over the property purportedly sold. Petitioner had no voice in whether any particular cow was allocated to his herds, retained in his herds, sold, or transferred to another herd. There was, in fact, no segregation of the cattle into separate herds. From Southern Star’s management perspective, all cows were in a single herd. Giving petitioner the benefit of every favorablel tendency of the evidence, the most that we can conclude ¿is that if the purchase price had been paid in full, petitioner might then have demanded possession of his herds. That never occurred and economically could not occur. Legally, practically, and realistically, petitioner provided Southern Star with funds to develop its own herd which in fact it failed to do. In exchange, he received tax benefits. This may not have been what petitioner intended, but it is what did happen and all that could happen with the poor quality cows which comprised the Southern Star herds and with the poor management practices. We believe that the control exercised in this case by Southern Star is one of the most important factors in determining what, if anything, petitioner acquired.
In Siegel, we held that given the substantial disparity between the stated purchase price and the fair market value of the cattle, petitioners acquired no equity in the cattle they purported to purchase. Here, petitioner may have acquired some equity in the females he purported to purchase in the first herd through his payments on principal. That would depend, in part, on the manner in which the
Our findings that the benefits and burdens of ownership were not transferred to petitioner is further evidenced by the fact that, until the full purchase price and accrued interest and maintenance fees on each herd were paid, here as in Siegel, an extremely improbable event, petitioner did not have the right to possession of the cattle. Petitioner also did not bear the risk of loés or damage to the cattle, a risk Southern Star continued to' bear. Finally, petitioner was not entitled to any profits from the sales of cattle under his second contract. It is unclear whether he had such a right under the first contract, although, in point of fact, he received no payments even though on paper some were purportedly credited to him. It is quite evident that Southern Star never had any intention of making any cash payments to petitioner or to its other investors.
Viewed in its entirety, the arrangement between petitioner and Southern Star does not support a finding that any benefits or burdens of ownership were transferred to petitioner. The failure to transfer the benefits and burdens of ownership supports our conclusion that no sale occurred for tax purposes. At least from Southern Star’s standpoint, petitioner received tax benefits for his money, as Southern Star officials told him repeatedly. That this was not what petitioner intended or expected is unfortunate, but that does not change our analysis.
Section 6621(c)
By amendment to the answer, respondent asserted the applicability of section 6621(d), now section 6621(c), dealing with interest on a substantial underpayment attributable to a tax-motivated transaction. Because respondent has raised this issue for the first time in the answer, he bears the burden of proof. Rule 142(a); Rose v. Commissioner,
Section 6621(c)(3)(A)(v) was added by Congress specifically to include a sham or fraudulent transaction within the scope of this additional interest section.
Decision will be entered under Rule 155.
Reviewed by the Court.
Notes
A11 section references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioner’s second investment was actually made with G&L Management, Inc., a wholly owned subsidiary of Southern Star. The parties do not contend that there is any special significance to be attributed to the fact that the second transaction was with this subsidiary. Therefore, for convenience, we will refer throughout to Southern Star.
The friend, Ned Levine, is one of the incorporators of Southern Star. The record contains a projection made by petitioner after the fact, presumably in anticipation of this case.
In describing petitioner’s arrangement with Southern Star and with its subsidiary G&L Management, Inc., we use words such as “purchase,” “sale,” “owned,” “owner,” and similar terms simply for convenience but without intending any inference, by the use of these words, as to the tax characterization or consequences of any aspect of the transactions.
The parties have so stipulated, and we made this finding of fact in Hunter v. Commissioner,
It is unclear on this record whether all of the cows in this herd were registered Aberdeen Angus, since the description of the herd omits registration numbers for several animals.
None of these notes are in the record. We assume that nonrecouse notes were executed as specified in the sales agreement.
The 1971 agreements do not guarantee a stated percentage of live calf births, although such a guarantee was typically included in Southern Star’s management agreements.
The stipulation recites that the suit was filed in 1975, but the case number indicates that the suit was filed in 1979, and petitioner so testified.
These values are based upon the testimony of respondent’s expert, which we found thoroughly credible. Petitioner’s expert was not nearly as knowledgeable of the sales prices of cattle or of the particular cattle involved here. His testimony was largely theoretical and valueless.
While there are a number of differences between petitioner’s 1971 management agreements and those in Siegel and Hunter, none are material. In fact, most of the differences appear to be less favorable to the investor. The 1972 sales and management agreements signed by petitioner are substantially identical to those involved in Siegel and Hunter.
Petitioner apparently contemplated remaining in the program for 10 years, although the 1971 management agreement covering his principal herd provided that Southern Star could liquidate the herd after June 1, 1980.
This holding does not imply that evidence as to profit motive is immaterial.
In our decision in Rice's Toyota World, Inc. v. Commissioner,
“Where a taxpayer, cognizant of potential tax benefits, enters into a transaction of questionable economic worth, the tests developed under the sham transaction doctrine are applied to determine whether a threshold level of business purpose or economic substance is present.”
Also at page 209 we again stated:
“In summary, the sham transaction theory is used to separate those ‘business transactions’ entitled to deference from those which are not. It requires that business transactions meet a minimum threshold of a business purpose or economic objective. * * *”
We did not by this language, or by any of the language in footnote 17, on page 203, intend to imply that a mere profit objective requires recognition of the transaction for tax purposes.
As we said in Dreicer v. Commissioner,
Although there is very little in the record as to purported purchases by Southern Star of cattle from Cherin, we assume that what purchases were made, were made at inflated prices as was true in Siegel, and that no cash payments were ever made to petitioner.
Under applicable State law the agreements of sale themselves may be sufficient to transfer legal title.
Siegel v. Commissioner,
Pub. L. 99-514, sec. 1535(a), 100 Stat. 2085, 2750.
Concurrence Opinion
concurring: I wish to explain my reason for concurring in the result reached by the majority in this case but for not joining the majority opinion. The majority opinion concludes that the transaction before us lacked economic substance and canriot be recognized for tax purposes. I agree with that result. The majority opinion, however, also implies that a taxpayer’s profit motive is not relevant or material to the determination of the economic substance of a transaction: With that proposition I disagree.
As we stated in Dreicer v. Commissioner,
[the ultimate question] must be determined by a careful analysis of all the surrounding objective facts, and greater weight is given to such facts than to [the taxpayer’s] mere statement of intent. * * *
In this case, I would hold that petitioner’s testimony concerning his purpose for entering into the transaction and the objective facts, taken together, fail to establish that the transaction had economic substance and fail to establish that petitioner had an actual and honest profit objective for entering into the transaction.
JACOBS, J., agrees with this concurring opinion.
Concurrence in Part
concurring in part and dissenting in part: I agree with that part of the majority’s opinion holding that the purported sales of cattle were lacking in economic substance, and that the benefits and burdens of ownership were not transferred to petitioner. Furthermore, I agree with the majority that no finding regarding petitioner’s profit motive is needed to reach these conclusions, because (on the basis of the record’ in the instant case) the result would be the same as to these issues, whether or not petitioner had a predominant profit motive.
However, I dissent from that part of the majority’s holding that the transaction is a “sham”, within the meaning of section 6621(c)(3)(A)(v).
Section 6621(c)
The majority hold that “The transactions between Cherin and Southern Star are ‘shams’ for purposes of section 6621(c)(3)(A)(v), both because they lacked economic substance and because the benefits and burdens of ownership did not pass to him”.
In providing for the higher-- interest rate, the Congress chose to use the “handle” of “tax motivated transactions”. This term suggests that the taxpayer’s motive is to be critical in determining whether the higher interest rate is to apply. However, the Congress chose to provide a complete definition of this term in paragraph (3)(A) of section 6621(c). An examination of the first three clauses of this definition suggests an intention that the taxpayer’s motive ordinarily
Thus, when the Congress added “(v) any sham or fraudulent transaction”, in the Tax Reform Act of 1986, the Congress had before it a definition of tax-motivated transaction that was mostly “no-fault” but that had some alternatives that depended on the taxpayer’s motives. The question in the instant case is whether “sham” is to be no-fault or is to be affected by petitioner’s motives.
The majority contend that “the presence of a profit motive does not preclude a «determination that a transaction lacks economic substance and thus is a sham”. (See p. 1001.) I disagree with their application of this analysis to section 6621(c)(3)(A)(v).
The intended effect of the 1986 amendment to section 6621(c) is expressed in the Statement of the Managers attached to the Conference report (H. Rept. 99-841 (Conf.) 11-796 (1986), 1986-3 C.B. (Vol. 4) 796), as follows:
The Tax Court has recently held (DeMartino v. Comm’r.,T.C. Memo 1986-263 (June 30, 1986); Forseth v. Comm’r.,T.C. Memo 1985-279 (June 11, 1985)) that sham transactions that would be subject to this special interest rate were they not shams are not subject to this special interest rate because they are shams. The conferees view it as anomalous that a genuine transaction (lacking the proper profit motive) would be subject to a higher interest rate, while a sham transaction, which is significantly more abusive, would escape the higher interest rate simply because it is a sham. Accordingly, the conference agreement, consistent with the legislative intent in originally enacting section 6621(d) in 1984 [redesignated as sec. 6621(c) by the Tax Reform Act of 1986], explicitly adds sham or fraudulent transactions to the list of transactions subject to this higherinterest rate. The intent of the conferees is to reverse the holding of these Tax Court cases on this issue. [Emphasis added.]
In Forseth v. Commissioner,
respondent has thus raised numerous alternative grounds for disallowance, not all of which are “tax motivated transactions” as defined in section 6621(d)(3)(A).6 [Emphasis in original.]
The opinion in Forseth dealt with “preconceived shams lacking in economic substance”, that is, those situations where, together with a fictitious transaction there is the absence of an honest profit objective. In our later opinion in the same case, Forseth v. Commissioner,
Petitioners have failed to prove that there was any actual gold or platinum, that there was any real market or trading, or that there was any purpose, other than the avoidance of taxes, for any of the transactions in issue. [Fn. ref. omitted.]
There, as here, though the taxpayers appeared to be utilizing an organized market, they were in fact creating a market for their transactions at prices they established for ulterior purposes. [Emphasis in original.]
As is indicated in the portion of the Statement of Managers quoted above, the intent of section 6621(e)(3)(A)(v) was to reverse our decisions in Forseth v. Commissioner,
Further evidence that the^Congress meant for us to read an intent requirement intoj the word “sham” as used in section 6621(c)(3)(A)(v), is found in the fact that the term is paired with the term “fraudulent”. This appears to have been done in an effort to ensure that an abusive transaction would not escape the higher interest rates mandated by section 6621(c). That a finding of fraud requires a finding of improper intent is too well-established to require citation. The fact that “sham” was listed with “fraudulent”, absent any evidence that Congress was attempting to remedy two completely dissimilar problems by adding the one five-word clause, indicates that “sham” as well as “fraudulent” was meant to carry with it an intent requirement.
The majority’s analysis leads to harsh results in other cases.
For example, suppose that a taxpayer’s employee embezzles funds in year 1 by fictitious purchases of inventory items. The taxpayer’s tax return for year 1 reflects the fictitious transactions as increases in cost of goods sold. When the embezzlement is discovered, in year 3, it is clear that the original treatment of the matter as increased cost of goods sold for year 1 was erroneous. Instead, the
The majority would arrive at the same result if the embezzlement were by way of fictitious purchases of supplies and small tools.
The imposition of the additibnal tax in such cases would not be commanded by the language that the Congress enacted, nor by the legislative history. Yet, this result would flow inexorably from the majority’s definition of “sham” for purposes of section 6621.(c)(3)(A)(v).
I am reluctant to believe that the Congress added the sham or fraudulent transaction clause in order to impose penalty interest on the unwitting victim in a business embezzlement or investment swindle case. Accordingly, I would hold that a transaction would not be punished under clause (v) of section 6621(c)(3)(A) if the taxpayer’s purpose in entering into the transaction would satisfy the purpose aspect of the deduction requirements of section 162(a) or 212.
[The taxpayer’s] motive is the ultimate question [in deciding whether to apply sec. 183]; yet, it must be determined by a careful analysis of all the surrounding objective facts, and greater weight is given to such facts than to his mere statement of intent. * * *
I would hold that, because respondent (who has the burden of proof in the instant case, see note 3, supra) did not establish that petitioner lacked a profit motive, the transaction is not a “sham” within the meaning of section 6621(c)(3)(A)(v).
This may be of small comfort to petitioner in the instant case because much of his underpayment may be attributable to a valuation overstatement (sec. 6621(c)(3)(A)(i)), in accordance with our, analyses in Rose v. Commissioner,
SEC. 6621. DETERMINATION OP RATE OF INTEREST.
(c) Interest on Substantial Underpayments Attributable to Tax Motivated Transactions.—
(1) In general. — In the case of interest payable under section 6601 with respect to any substantial underpayment attributable to tax motivated transactions, the annual rate of interest established under this section shall be 120 percent of the underpayment rate established under this section.
(2) Substantial underpayment attributable to tax motivated transactions. — For purposes of this subsection, the term “substantial underpayment attributable to tax motivated transactions” means any underpayment of taxes imposed by subtitle A for any taxable year which is attributable to 1 or more tax motivated transactions if the amount of the underpayment for such year so attributable exceeds $1,000.
(3) Tax motivated transactions.—
(A) In general. — For purposes of this subsection, the term “tax motivated transaction” means—
(i) any valuation overstatement (within the meaning of section 6659(c)),
(ii) any loss disallowed by reason of section 465(a) and any credit disallowed under section 46(c)(8),
(iii) any straddle (as defined in section 1092(c) without regard to subsections (d) and (e) of section 1092), and
(iv) any use of an accounting method specified in regulations prescribed by the Secretary as a use which may result in a substantial distortion of income for any period, and
(v) any sham or fraudulent transaction.
I read this statement as indicating that either lack of economic substance or the failure of the benefit and burdens of ownership to pass will cause the transaction to be deemed a “sham”.
As the majority point out, respondent bears the burden of proof on this issue in the instant case. (P. 1000.) The majority find that “In this case petitioner’s testimony and the objective facts are not so strongly conclusive with respect to the existence of a predominant nontax motive as to mandate a finding to that effect”. (P. 992.) Since the majority do not conclude that petitioner lacked a profit motive, where the burden is on respondent we can conclude that respondent has failed to prove that petitioner did not have a profit motive for entering into the transaction. See, e.g., Anselmo v. Commissioner,
A-3(9)(ii) depends on whether the taxpayer had tax-avoidance purposes and not business purposes. A-4(l) depends on whether the activity was engaged in for profit. A-4(2) depends on whether the transaction was entered into for profit.
We recognize that our holding means that a real straddle not meeting the requisite profit standard might constitute a “tax motivated transaction” under sec. 6621(d), whereas a purely fictitious “straddle” would not. While this result might seem anomalous, we believe that it is the necessary consequence of the absence, of such factual sham transactions from the statutory or regulatory definitions of tax motivated transactions, and of the explicit inclusion b)y Congress, by reference to the definition of “straddle” in sec. 1092(c), of transactions which are straddles not just in form but in substance.
The Tax Reform Act of 1984 originally enacted the provision dealing with interest on substantial underpayments attributable to tax-motivated transactions as subsec. (d) of sec. 6621. The Tax Reform Act of 1986 redesignated this provision as subsec. (c) of sec. 6621.
Since these expenditures would be deductible in arriving at adjusted gross income, as would theft, this presumably would not present the mitigation problems dealt with in the various opinions in B.C. Cook & Sons, Inc. v. Commissioner,
The majority refer to Patin v. Commissioner,
Dissenting Opinion
dissenting: While I do not necessarily disagree with the result reached by the majority, because I so strongly disagree with a portion of the analysis used by the majority in reaching that result, I must dissent.
The majority holds that expenses and losses attributable to a transaction that lacks economic substance — that is, a transaction that lacks a realistic potential for profit — are not deductible regardless of whether the taxpayer participated in the transaction with the primary purpose and objective of making a profit. In my view, this holding is in
Whether a taxpayer has an actual and honest profit objective is a question of fact, to be resolved on the basis of all the facts and circumstances of the case, and greater weight should be given to objective facts than to mere statements of intent by the taxpayer. Sec. 1.183-2(b), Income Tax Regs.; Gefen v. Commissioner,
Because the majority holds that expenses and losses attributable to a transaction that lacks economic substance are not deductible regardless of whether the taxpayer participated in the transaction with the primary purpose and objective of making a profit, I dissent.
I do not mean to suggest that a taxpayer’s profit motive (or lack thereof) is relevant in determining whether a transaction constitutes a bona fide sale in the first instance. Whether a transaction constitutes a sale for tax purposes depends on whether the benefits and burdens ‘of ownership pass from one party to another. Grodt & McKay Realty, Inc. v. Commissioner,