Opinion ID: 778862
Heading Depth: 2
Heading Rank: 2

Heading: Factual Sham

Text: 62 The District Court's holding that the COLI transaction as a whole lacked economic substance, and thus was an economic sham, is undoubtedly correct. Thus, we do not reach the issue of whether the separate components of the transaction were factual or economic shams. However, we must clarify that we do not find the loading dividends to be factual shams. Factual shams are transactions that never actually occurred. Lerman v. Commissioner, 939 F.2d 44, 48 n. 6 (3d Cir.1991). A circular netting transaction, where different loans and payments are deemed to occur simultaneously (and thereby offset each other), is not by definition a factual sham. As the District Court pointed out, the simultaneous netting of the payment and the loan with the policy value as collateral that occurred in years 1-3 is common in the industry, and is a transaction with economic substance. CM Holdings, 254 B.R. at 602. The loading dividends of years 4-7 were similar simultaneous netting transactions that actually occurred, and are therefore not factual shams. They were not performed in violation of some of the background assumptions of commercial dealing, for example arms-length dealing at fair market values. Horn, 968 F.2d at 1236 n. 8. The fact that these dividends were not industry practice is, however, evidence that they were economic shams.