Cherin v. Commissioner

STERRETT, Chief Judge, 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 direct conflict with those cases that hold that if a taxpayer engages in a transaction or activity with the primary purpose and objective of making a profit, the expenses and losses attributable to the transaction or activity are deductible as trade or business expenses under section 162, as expenses incurred for the production of income under section 212, or as losses under section 165. See Commissioner v. Groetzinger, 480 U.S (1987); Capek v. Commissioner, 86 T.C. 14, 36 (1986); Lemmen v. Commissioner, 77 T.C. 1326, 1340 (1981); Jasionowski v. Commissioner, 66 T.C. 312, 318-319 (1976). 1

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, 87 T.C. 1471, 1497 (1986); Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983). To be sure, a transaction’s ;economic substance (or lack thereof) is an objective fact tb be considered in determining whether a taxpayer participated in the transaction with the requisite profit objective. However, in my view, the presence or absence of economic substance, standing alone, is not dispositive as the majority so holds; rather, as we noted in Dreicer v. Commissioner, supra at 645, “[the taxpayer’s] motive is the ultimate question.”

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, 77 T.C. 1221, 1237 (1981). As we noted in Grodt & McKay Realty, Inc., however, a transaction that purports to be a sale, but which is not, is not necessarily a sham. 77 T.C. at 1243. I agree with Judge Chabot that a transaction is a “sham” for purposes of sec. 6621(c)(3)(A)(v) only if the taxpayer participates in the transaction without the primary purpose and objective of making a profit, which is precisely the same standard for determining whether a taxpayer’s expenses and losses are deductible under secs. 162, 165, and 212.