Legal Definitions - Sham transaction

A sham transaction is a type of transaction that is either illegal or fake. Transactions that are fake or illusory, meaning they exist only on paper and have no real-world consequences, can be voided by a court of law. This is especially true if the transaction is used as a way to deceive or avoid taxes.

• A company creates a fake invoice for services that were never provided in order to claim a tax deduction.
• An individual transfers ownership of a property to a family member for a nominal fee in order to avoid paying taxes on the sale of the property.
• A business owner creates a shell company to funnel money through in order to avoid paying taxes on the profits.

These examples illustrate how sham transactions can be used to deceive or avoid taxes. In each case, the transaction is not a legitimate business transaction, but rather a way to manipulate the system for personal gain. Courts can void these transactions and impose penalties on those who engage in them.