Sham Transactions in the United States
Abstract: Policymakers in the US have noted that individuals and businesses have become alarmingly adept at using the letter of the law to obtain unintended benefits and advantages. This deception and pretense can be found in a wide variety of legal contexts, and includes activites and plans that are labeled “sham marriages,” “sham retirements,” “sham leases,” “sham litigation,” and so forth. Government lawyers note that these and other similar types of transactions have the appearance of law-abiding behavior, but are in fact nothing more than fraud. The problem for government litigators, however, is that many sham activities are entirely consistent with statutory and administrative law and thus are particularly difficult to challenge in court. In this essay, we focus on alleged corporate tax shams and the American judiciary’s response to these transactions when they are litigated in the high court. In doing so, we aim to identify the factors that convince judges that certain behavior crosses the line from legal acceptability to abusive activity. We hope that our study provides transparency to judicial decision making in the context of corporate tax shams, but also into other legal contexts in which courts characterize ostensibly legal behavior as abusive and fraudulent.
