[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.269-2]

[Page 589-590]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.269-2  Purpose and scope of section 269.

    (a) General. Section 269 is designed to prevent in the instances 
specified therein the use of the sections of the Internal Revenue Code 
providing deductions, credits, or allowances in evading or avoiding 
Federal income tax. See Sec. 1.269-3.
    (b) Disallowance of deduction, credit, or other allowance. Under the 
Code, an amount otherwise constituting a deduction, credit, or other 
allowance becomes unavailable as such under certain circumstances. 
Characteristic of such circumstances are those in which the effect of 
the deduction, credit, or other allowance would be to distort the 
liability of the particular taxpayer when the essential nature of the 
transaction or situation is examined in the light of the basic purpose 
or plan which the deduction, credit, or other allowance was designed by 
the Congress to effectuate. The distortion may be evidenced, for 
example, by the fact that the transaction was not undertaken for reasons 
germane to the conduct of the

[[Page 590]]

business of the taxpayer, by the unreal nature of the transaction such 
as its sham character, or by the unreal or unreasonable relation which 
the deduction, credit, or other allowance bears to the transaction. The 
principle of law making an amount unavailable as a deduction, credit, or 
other allowance in cases in which the effect of making an amount so 
available would be to distort the liability of the taxpayer, has been 
judicially recognized and applied in several cases. Included in these 
cases are Gregory v. Helvering (1935) (293 U.S. 465; Ct. D. 911, C.B. 
XIV-1, 193); Griffiths v. Helvering (1939) (308 U.S. 355; Ct. D. 1431, 
C.B. 1940-1, 136); Higgins v. Smith (1940) (308 U.S. 473; Ct. D. 1434, 
C.B. 1940-1, 127); and J. D. & A. B. Spreckles Co. v. Commissioner 
(1940) (41 B.T.A. 370). In order to give effect to such principle, but 
not in limitation thereof, several provisions of the Code, for example, 
section 267 and section 270, specify with some particularity instances 
in which disallowance of the deduction, credit, or other allowance is 
required. Section 269 is also included in such provisions of the Code. 
The principle of law and the particular sections of the Code are not 
mutually exclusive and in appropriate circumstances they may operate 
together or they may operate separately. See, for example, Sec. 1.269-
6.

[T.D. 6595, 27 FR 3596, Apr. 14, 1962]