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. Our principal Ted Craft is an expert in analyzing business transactions to determine whether or not they are sham transactions.
Depending on the motive, the IRS may view sham transactions as a civil matter and simply adjust the amount of individual taxes due, or seek a criminal prosecution.
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Substance Over Form
In applying income tax laws, the substance of the transaction, rather than its form, determines the tax consequences. In reviewing a transaction, if the IRS finds the economic substance of the transaction is not reflected in the form, it may adjust the corporate taxes to reflect the substance. Depending on the motive, the taxpayer may also face criminal charges.
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:
- A corporation sells assets in the corporation to a shareholder in return for a note payable by the shareholder to the corporation.
- The shareholder does not pay the corporation the note.
- 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.
Our principal Ted Craft is an expert in analyzing "substance over form" transactions for clients in the Boston area.
To qualify your tax case, call Theodore Craft at 781-665-6872.
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Tax Law Practice
Concentration in all tax issues with the Internal Revenue Service
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
Email
Boston tax attorney Theodore L. Craft serves clients throughout Massachusetts and southern New Hampshire, including Cape Cod, Martha's Vineyard, The Berkshires, and the communities of Melrose, Springfield, Cambridge, Worcester, New Bedford, Dedham, Plymouth, Lynn, Saugus, Medford, Somerville, Waltham, Newton, Milton, Quincy, Hingham, Weymouth, Brockton, Marlborough, Peabody, Danvers, Agawam, Ludlow, Westfield, Chicopee, Holyoke, Northampton, Auburn, Middleborough, Wareham, Duxbury, Longmeadow, Peabody, Salem, and Danvers, MA, as well as, Nashua, Manchester, Merrimack, and Londonderry, NH.
Suffolk County • Middlesex County • Worcester County • Norfolk County • Plymouth County
