The taxpayer must prove that the underlying economic transaction was not concocted to avoid or reduce tax liability. In the Gregory Vs. Helvering case, the Supreme Court actually uses the word 'sham'.
Economic Substance Principle
A legal principle used by the courts to interpret the meaning of the Tax Code in regards to sham transactions designed to avert payment of taxes. For an in-depth understanding and examples of its use, read: Economic Substance Princple (Doctrine).