Dr. Avi Nov, Adv.
In this regard, subsequent US court decisions have held that where there is a genuine transaction with economic substance, motivated by business realities and non-tax considerations, and is not shaped solely by tax avoidance features, it should be upheld by the authorities.
In Merryman v. Commissioner, 873 F.2d 879, 881 (5th Cir. 1989), and Holladay v. Commissioner, 649 F.2d 1176, 1179 (5th Cir. Unit B 1981), the courts ruled that the existence of a tax benefit resulting from a transaction, does not automatically make it a sham or artificial transaction as long as the said transaction is imbued with tax-independent considerations.
In the Compaq decision, in an attempt to determine the nature of a transaction, the court indicated a two-prong test:
The court noted that in the context of determining business purpose, a taxpayer’s subjective attempt to avoid taxes would not, in itself, determine the absence of business purpose. Even if the taxpayer sought to obtain otherwise unavailable tax benefits, this would not necessarily invalidate the transaction.
If, for example, a corporate structure lacks business rationale or economic substance, then section 86 of the Israel Tax Ordinance may be applied to disregard the structure. See also: Artificial Transaction in Israel tax law.