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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 parties. SHAM TRANSACTIONS 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 |