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Sham Doctrine Explained
Excerpt from website linked here
.U.S. v. Phellis, 257
U.S. 156, 168 (1921); Weinert’s Est. v.
Cm, 294 F. 2d 750, 755 (5
the Cir. 1961).
The "form" of a transaction is generally
the label the parties attach to their
arrangement; for instance, they might
call an arrangement a compensation
agreement, a loan, a lease or a sale.
There might be documents that support
the form, but the courts are not
concerned with these labels or
documents that purport to govern the
transaction — the courts focus on the
substance of the transaction,
regardless of the labels used by the
The sham transaction concept
embodies two separate theories:
A sham in fact — which is a fictional
transaction that never actually occurred.
o A sham in substance is a transaction
that actually occurred but
which lacked the substance the form
allegedly represented. Kirchman v. Cm,
862 F. 2d 1486 (11
the Cir. 1989).
A sham in substance occurs when the
taxpayer draws up papers to
characterize a transaction contrary to
the objective economic realities and
which have no economic significance
beyond the expected tax benefits.
Falsetti v. Cm, 85 TC 332 (1985).
A transaction is considered a sham in
substance if it effects no real change in
each party’s economic position. For
example, a sale that fails to transfer
beneficial ownership of property — in
which the payments circulate among
various parties in ways that cancel
themselves out — would be considered
a sham in substance.
In Rice’s Toyota World, Inc. v. Cm, 752
F.2d 89, 91 (4th Cir. 1985), the Court