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According to Theodore Craft, a tax Attorney, formerly with the IRS Office of Chief Counsel. Mr. Craft is an expert in analyzing business transactions to determine whether or not they are sham transactions.
Sham Transactions
"When a business transaction or plan does not have as its objective earning a profit, but is performed merely for tax motives, the business faces a potential tax issue with the IRS. The IRS may regard the transaction as a sham transaction - which is a transaction without economic substance. Sham transactions may result in civil and criminal tax penalties."
"An example of a sham transaction is an artificial loss on a business transaction created for tax purposes."
Substance Over Form
"In applying income tax laws, the substance of the transaction, rather than its form, determines the tax consequences."
The "substance over form" analysis is used to dissect self-serving transactions between parties, such as transactions between corporations and their shareholders and partners. Here is an example of a substance-over-form transaction:
1. A corporation sells assets in the corporation to a shareholder in return for a note payable by the shareholder to the corporation.
2. The shareholder does not pay the corporation the note.
3. The corporation declares the note uncollectible and writes it off as a receivable it will never receive.
This is an example of a criminal substance-over-form case. The substance of the case is that the shareholder took the assets form the company without any intention of paying the note.
Formerly with the IRS Office of Chief Counsel
Theodore L. Craft, Attorney at Law
49 Myrtle Street
Melrose, Massachusetts 02176
Telephone: 781-665-6872 | 617-523-7600 | 1-888-TAX-RISK
Fax: 781-662-2430