Opinion ID: 512048
Heading Depth: 3
Heading Rank: 1

Heading: The Correct Standard

Text: 16 Section 616(a) allows taxpayers to deduct all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit ... if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed. A taxpayer may deduct development costs only if the primary objective of the mining venture was to make a profit. Thomas v. Commissioner, 792 F.2d 1256, 1259 (4th Cir.1986). However, the court does not inquire into a transaction's primary objective until it determines that the transaction is bona fide, that is, not a sham. Sochin, 843 F.2d at 353-54 n. 6. In determining the existence of a sham, we apply the Sochin court's analysis: the court should determine whether the transaction had any practical economic effects other than the creation of income tax losses. 843 F.2d at 354. Both the taxpayer's subjective business purpose and the venture's economic substance may be relevant to this inquiry. Id.