The taxpayer’s argument was clever, in that if all of their transactions were viewed as shams, and where nothing of any real economic substance happened, then there would be no event triggering of tax recognition, as no property would have changed hands.
The Tax Court, however, disagreed with their assertion. The court noted that the majority of transactions were shams, as the creation of new partnerships, short sales and other related steps had no business purpose beside tax avoidance, and could be disregarded.
However, the court found that the transaction that transferred the ownership of the property from the family partnership to the family was not a sham. The family partnership had owned the property for years. At this point in time, the owners wanted to retire and transfer those assets from the partnership to the family, which the court viewed as a transaction of non-tax substance, was the real goal of their machinations.
They merely wanted to engineer the deal in such a way as to eliminate or minimize any taxable gain. Nonetheless, the separation of the property from the partnership and transfer of it to the family was fundamental goal, as they wanted to sell the funeral homes operation to a third-party corporation and the family members would lease the real property back to that corporation.
The court refused to allow the taxpayer to play “the audit lottery,” where the taxpayer obtains the tax advantage of the sham transaction if they are not audited, but if they are caught by an audit, to then claim as a defense that the entire series of transactions were all shams, and that there was no taxable event.
Source: ustaxcourt.gov, “CNT INVESTORS, LLC, CHARLES C. CARROLL, TAX MATTERS PARTNER, v. COMMISSIONER OF INTERNAL REVENUE,” 144 T.C. No. 11, March 23, 2015