United States Court of Appeals For the Seventh Circuit
Tax — business losses
Where a limited liability company had no business purpose, its loses are not deductible.
“A transaction that would make no commercial sense were it not for the opportunity it created to beat taxes doesn’t beat them. Substance prevails over form. See Gregory v. Helvering, 293 U.S. 465, 470 (1935), and Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 439 (1943), and for application to a sham partnership Southgate Master Fund, L.L.C. v. United States, supra. The question is ‘whether the partners really and truly intended to join together for the purpose of carrying on business and sharing in the profits or losses or both.’ Commissioner v. Tower, 327 U.S. 280, 287 (1946); see also Commissioner v. Culbertson, 337 U.S. 733, 742 (1949); Southgate Master Fund, L.L.C. v. United States, supra, 659 F.3d at 483–91; TIFD III?E, Inc. v. United States, 459 F.3d 220, 231– 32 (2d Cir. 2006); ASA Investerings Partnership v. Commissioner, supra, 201 F.3d at 511–13; Cunningham & Cunningham, supra, at 3. No joint business goal motivated the creation of Warwick. Arapuã’s aim was to extract some value from its otherwise worthless receivables, Jetstream’s aim to make the losses in those receivables a tax bonanza.”
Appeals from the United States Tax Court, Posner, J.